**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 20–F**

 

----

 
| **o**      | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR  (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                               | ** ** |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                                                                                                                             |       |
| ** ** | **OR**                                                                                                                                                                                                           | ** ** |
|       |                                                                                                                                                                                                             |       |
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                              | ** ** |
| ** ** | ** **                                                                                                                                                                                                       | ** ** |
|       | **For the fiscal year ended December 31, 2004**                                                                                                                                                             |       |
|       |                                                                                                                                                                                                             |       |
|       | **OR**                                                                                                                                                                                                           |       |
|       |                                                                                                                                                                                                             |       |
| ** ̈** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                          |       |
|       |                                                                                                                                                                                                             |       |
|       | **For the transition period from                 to               ** |       |
|       |                                                                                                                                                                                                             |       |
|       | **Commission file number: 1-15224**                                                                                                                                                                              |       |

 

----

 

**COMPANHIA ENERGÉTICA DEMINAS GERAIS—CEMIG**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Energy Company of Minas Gerais**                   | ** ** | **The Federative Republic of Brazil**           |
|------------------------------------------------------|------------|-------------------------------------------------|
| (Translation of Registrant’s Name into English) |       | (Jurisdiction of Incorporation or Organization) |

 

**Avenida Barbacena, 120030190-131 Belo Horizonte, Minas Gerais, Brazil**

(Address of Principal Executive Offices)

 

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

 
| **Title of  Each Class**                                                                                               | ** ** | **Name of  Each Exchange on which Registered** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|
| **American Depositary Shares  (evidenced by American Depositary Receipts), each representing 1,000  Preferred Shares** | ** ** | **New York Stock Exchange**                    |
|                                                                                                                   |       |                                           |
| **Preferred Shares, R$0.01 par  value***                                                                               | ** ** | **New York Stock Exchange***                   |

 

----

 

----

*                                         Notfor trading purposes, but only in connection with the registration of AmericanDepositary Shares pursuant to the requirements of the Securities and ExchangeCommission.

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:**  None**

 

Securities for which there is a reporting obligation pursuant to Section 15(d) ofthe Act:**  None**

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

70,874,167,923 Common Shares

91,210,522,699 Preferred Shares

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý No o

 

Indicate by check mark which financial statement item the registranthas elected to follow.

Item 17  oItem 18 ý

 

 

----

 

**Table of Contents**

 
| PART I                           |                                                                          |   | 4      |
|---------------------------------------|-------------------------------------------------------------------------------|--------|--------|
|                                  |                                                                          |   |   |
| Item  1.                              | Identity  of Directors, Senior Management and Advisers                        |   | 4      |
|                                  |                                                                          |   |   |
| Item 2.                               | Offer  Statistics and Expected Timetable                                      |   | 4      |
|                                  |                                                                          |   |   |
| Item 3.                               | Key Information                                                               |   | 4      |
|                                  |                                                                          |   |   |
| Item 4.                               | Information on the  Company                                                   |   | 19     |
|                                  |                                                                          |   |   |
| Item  5.                              | Operating  and Financial Review and Prospects                                 |   | 51     |
|                                  |                                                                          |   |   |
| Item  6.                              | Directors,  Senior Management and Employees                                   |   | 73     |
|                                  |                                                                          |   |   |
| Item  7.                              | Major  Shareholders and Related Party Transactions                            |   | 82     |
|                                  |                                                                          |   |   |
| Item 8.                               | Financial Information                                                         |   | 84     |
|                                  |                                                                          |   |   |
| Item 9.                               | The Offer and Listing                                                         |   | 90     |
|                                  |                                                                          |   |   |
| Item 10.                              | Additional Information                                                        |   | 93     |
|                                  |                                                                          |   |   |
| Item  11.                             | Quantitative  and Qualitative Disclosures about Market Risk                   |   | 116    |
|                                  |                                                                          |   |   |
| Item  12.                             | Description  of Securities Other than Equity Securities                       |   | 119    |
|                                  |                                                                          |   |   |
| PART II                          |                                                                          |   | 120    |
|                                  |                                                                          |   |   |
| Item  13.                             | Defaults,  Dividend Arrearages and Delinquencies                              |   | 120    |
|                                  |                                                                          |   |   |
| Item  14.                             | Material  Modifications to the Rights of Security Holders and Use of Proceeds |   | 120    |
|                                  |                                                                          |   |   |
| Item 15.                              | Controls and  Procedures                                                      |   | 120    |
|                                  |                                                                          |   |   |
| Item 16A.                             | Audit  Committee Financial Expert                                             |   | 120    |
|                                  |                                                                          |   |   |
| Item 16B.                             | Code of Ethics                                                                |   | 120    |
|                                  |                                                                          |   |   |
| Item  16C.                            | Principal  Accountant Fees and Services                                       |   | 121    |
|                                  |                                                                          |   |   |
| Item 16D.                             | Not Applicable                                                                |   | 121    |
|                                  |                                                                          |   |   |
| Item  16E.                            | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers.      |   | 121    |
|                                  |                                                                          |   |   |
| PART III                         |                                                                          |   | 122    |
|                                  |                                                                          |   |   |
| Item 17.                              | Financial Statements                                                          |   | 122    |
|                                  |                                                                          |   |   |
| Item 18.                              | Financial Statements                                                          |   | 122    |
|                                  |                                                                          |   |   |
| Item 19.                              | Exhibits                                                                      |   | 122    |
|                                  |                                                                          |   |   |
| INDEX OF DEFINED TERMS                |                                                                          | 126    |
|                                  |                                                                          |   |   |
| Annex  A The Brazilian Power Industry |                                                                          | A-1    |

 

i

----

 

**PRESENTATIONOF FINANCIAL INFORMATION**

** **

Companhia Energéticade Minas Gerais–CEMIG is a *sociedade deeconomia mista* (a state-controlled mixed capital company) organizedand existing with limited liability under the laws of the Federative Republicof Brazil, or Brazil.  References in thisannual report to “CEMIG,” “we” or the “Company” are to Companhia Energética deMinas Gerais–CEMIG and its consolidated subsidiaries, except when the referenceis specifically to Companhia Energética de Minas Gerais–CEMIG (parent companyonly) 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 ourbooks and records in *reais*.  We prepare our financial statements inaccordance with accounting practices adopted in Brazil, including theprinciples that are established primarily through Law No. 6,404 of December 15,1976, Law No. 9,457 of May 5, 1997 and Law No. 10,303 of October 31,2001, which we refer to collectively as the Brazilian Corporate Law.  For purposes of this annual report, we havepresented, and in future reports to be filed with the United States Securitiesand Exchange Commission, or the Commission, we intend to present, ourconsolidated financial statements and other financial information in *reais* in accordance with accountingprinciples generally accepted in the United States, or U.S. GAAP.  For purposes of this annual report weprepared balance sheets as of December 31, 2004 and 2003 and the relatedstatements of operations and comprehensive income, cash flows and changes inshareholders’ equity for the years ended December 31, 2004, 2003 and 2002,in *reais* all in accordance withU.S. GAAP.  Deloitte Touche TohmatsuAuditores Independentes has audited our consolidated financial statements at December 31,2004 and 2003 and for each of the three years ended December 31, 2004,2003 and 2002.

 

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

 

This annual reportcontains translations of certain *real*amounts into U.S. dollars at specified rates solely for the convenience of thereader.  Unless otherwise indicated, suchU.S. dollar amounts have been translated from *reais*at an exchange rate of R$2.6550 to US$1.00, the noon buying rate in New YorkCity for cable transfers in *reais*as certified for customs purposes by the Federal Reserve Bank of New York, orthe noon buying rate, as of December 31, 2004.  The *real*has recently 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 convertedinto U.S. dollars, at the above rate or at any other rate.

 

1

----

 

**MARKETPOSITION AND OTHER INFORMATION**

** **

The informationcontained in this annual report regarding our market position is, unlessotherwise indicated, presented for the twelve-month period ended December 31,2004 and is based on, or derived from, reports issued by the *Agência Nacional de Energia Elétrica* (TheBrazilian National Electric Energy Agency), or ANEEL.

 

Certain terms aredefined the first time they are used in this annual report.  The “Index of Defined Terms” included in thisannual report lists those terms and where they are defined.  As used herein, all references to “GW” and “GWh”are to gigawatts and gigawatt hours, respectively, references to “MW” and “MWh”are to megawatts and megawatt-hours, respectively, and references to “kW” and “kWh”are to kilowatts and kilowatt-hours, respectively.

 

References in thisannual report to the “common shares” and “preferred shares” are to our commonshares and preferred shares, respectively. References to “American Depositary Shares” or “ADSs” are to AmericanDepositary Shares, each representing 1,000 preferred shares.  The ADSs are evidenced by American DepositaryReceipts, or ADRs, issued pursuant to a Second Amended and Restated DepositAgreement, 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 ADRsissued thereunder.

 

**FORWARD-LOOKINGINFORMATION**

** **

This annual reportincludes forward-looking statements, principally in “Item 3.  Key Information” and “Item 11.  Quantitative and Qualitative Disclosuresabout Market Risk.”  We have based these forward-lookingstatements largely on our current expectations and projections about futureevents and financial trends affecting our business.  These forward-looking statements are subjectto risks, uncertainties and assumptions relating to, among other things:

 

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

 

•                                          inflation andchanges in currency exchange rates;

 

•                                          enforcementof legal regulation in Brazil’s electricity sector;

 

•                                          changes involumes and patterns of customer electricity usage;

 

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

 

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

 

•                                          our level ofdebt;

 

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

 

•                                          trends in theelectricity generation, transmission and distribution industry in Brazil andMinas Gerais;

 

•                                          changes inrainfall and the water levels in the reservoirs used to run our hydroelectricpower generation facilities;

 

•                                          our capitalexpenditure plans;

 

•                                          our abilityto serve our customers on a satisfactory basis;

 

2

----

 

•                                          existing andfuture governmental regulation as to electricity rates, electricity usage,competition in our concession area and other matters;

 

•                                          existing andfuture policies of the Federal Government of Brazil, which we refer to as theFederal Government;

 

•                                          existing andfuture 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

 

•                                          other riskfactors as set forth under “Item 3.  KeyInformation—Risk Factors.”

 

Theforward-looking statements referred to above also include information withrespect to our capacity expansion projects that are under way and those that weare currently evaluating.  In addition tothe above risks and uncertainties, our potential expansion projects involveengineering, construction, regulatory and other significant risks, which may:

 

•                                          delay orprevent successful completion of one or more projects;

 

•                                          increase thecosts of projects; and

 

•                                          result in thefailure of facilities to operate or generate income in accordance with ourexpectations.

 

The words “believe,”“may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” andsimilar words are intended to identify forward-looking statements.  We undertake no obligation to update publiclyor revise any forward-looking statements because of new information, futureevents or otherwise.  In light of theserisks and uncertainties, the forward-looking information, events andcircumstances discussed in this annual report might not occur.  Our actual results and performance coulddiffer substantially from those anticipated in our forward-looking statements.

 

Neither ourindependent auditors, nor any other independent accountants, have compiled,examined or performed any procedures with respect to the forward-lookingfinancial information contained herein, nor have they expressed any opinion orany other form of assurance on such information or its achievability, and theyassume no responsibility for, and disclaim any association with, suchforward-looking financial information.

 

3

----

 

**PART I**

** **

# **Item 1.**           Identity ofDirectors, Senior Management and Advisers

# ** **

Not applicable.

 

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

# ** **

Not applicable.

 

# **Item 3.**           Key Information

# ** **

**SelectedConsolidated Financial Data**

 

The followingtables present our selected consolidated financial and operating information inU.S. GAAP as of the dates and for each of the periods indicated.  You should read the following informationtogether with our consolidated financial statements, including the notesthereto, included in this annual report and the information set forth in “Item5.  Operating and Financial Review andProspects.”

 

The selectedconsolidated financial data as of December 31, 2004 and 2003 and for eachof the three years ended December 31, 2004, 2003 and 2002 have beenderived from our audited consolidated financial statements and the notesthereto included elsewhere in this annual report.  The selected consolidated data as of December 31,2002, 2001 and 2000 and for the each of the two years ended December 31,2001 and 2000 has been derived from our audited consolidated financialstatements and notes thereto, which are not included in this annual report.

 

U.S. dollaramounts in the table below are presented for your convenience.  Unless otherwise indicated, these U.S. dollaramounts have been translated from *reais*at R$2.6550 per US$1.00, the noon buying rate as of December 31,2004.  The *real* has recently experienced high volatility.  We cannot guarantee that U.S. dollars can beconverted into *reais*, or that *reais* can be converted into U.S. dollars,at the above rate or at any other rate. On May 18, 2005, the noon buying rate for *reais*was R$2.4625 per US$1.00.  See “—Exchange Rates.”

 

4

----

 

**Selected Consolidated Financial Data**

 
| ** **                                                       | ** ** | **As of and for the year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                       | ** ** | **(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 customers                             |       | 3,224                                              |       | 8,561 |   | 7,179 |   | 5,458 |   | 4,587 |   | 4,478 |   |
| Regulatory extraordinary rate adjustment(3)                      |       | 34                                                 |       | 89 |   | 63 |   | 281 |   | 789 |   | — |   |
| Deferred rate adjustment (3)                                     |       | 241                                                |       | 640 |   | 199 |   |   |   |   |   |   |   |
| Electricity sales to the interconnected power system             |       | 14                                                 |       | 36 |   | 56 |   | 161 |   | 517 |   | 145 |   |
| Use of basic transmission network                                |       | 92                                                 |       | 245 |   | 257 |   | 185 |   | 154 |   | 139 |   |
| Other operating revenues                                         |       | 202                                                |       | 536 |   | 468 |   | 260 |   | 150 |   | 124 |   |
| Tax on revenues                                                  |       | (924                                               | )          | (2,453 | ) | (2,190 | ) | (1,473 | ) | (1,191 | ) | (1,130 | ) |
| Total net operating revenues                                     |       | 2,883                                              |       | 7,654 |   | 6,032 |   | 4,872 |   | 5,006 |   | 3,756 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs and expenses                                     |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Electricity purchased for resale.                                |       | (556                                               | )          | (1,477 | ) | (1,396 | ) | (1,333 | ) | (1,914 | ) | (819 | ) |
| Natural gas purchased for resale                                 |       | (101                                               | )          | (268 | ) | (246 | ) | (152 | ) | (84 | ) | (60 | ) |
| Use of basic transmission network                                |       | (221                                               | )          | (586 | ) | (310 | ) | (298 | ) | (251 | ) | (243 | ) |
| Depreciation and amortization                                    |       | (255                                               | )          | (677 | ) | (686 | ) | (666 | ) | (641 | ) | (583 | ) |
| Personnel                                                        |       | (297                                               | )          | (788 | ) | (710 | ) | (532 | ) | (531 | ) | (466 | ) |
| Regulatory charges                                               |       | (324                                               | )          | (861 | ) | (585 | ) | (548 | ) | (420 | ) | (433 | ) |
| Third-party services                                             |       | (124                                               | )          | (329 | ) | (325 | ) | (265 | ) | (216 | ) | (195 | ) |
| Employee post-retirement benefits                                |       | (58                                                | )          | (153 | ) | (109 | ) | (207 | ) | (293 | ) | (238 | ) |
| Materials and supplies                                           |       | (31                                                | )          | (83 | ) | (88 | ) | (78 | ) | (70 | ) | (71 | ) |
| Gain on Gasmig sale                                              |       | 38                                                 |       | 102 |   | — |   | — |   | — |   | — |   |
| Other                                                            |       | (153                                               | )          | (407 | ) | (422 | ) | (238 | ) | (274 | ) | (208 | ) |
| Reversal (Provision) for loss on deferred regulatory  assets (3) |       | (3                                                 | )          | (9 | ) | 174 |   | (28 | ) | (150 | ) | — |   |
| Provision for loss on account receivable from State  Government  |       | —                                             |       | — |   | (754 | ) | — |   |   |   |   |   |
| Total operating costs and expenses                               |       | (2,085                                             | )          | (5,536 | ) | (4,703 | ) | (4,345 | ) | (5,598 | ) | (3,316 | ) |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                          |       | 798                                                |       | 2,118 |   | 1,329 |   | 527 |   | (592 | ) | 440 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Financial income (expenses), net                                 |       | 132                                                |       | 350 |   | 674 |   | (525 | ) | (48 | ) | (42 | ) |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes and minority  interests        |       | 930                                                |       | 2,468 |   | 2,003 |   | 2 |   | (640 | ) | 398 |   |
| Income taxes (expense) benefit                                   |       | (275                                               | )          | (731 | ) | (607 | ) | (26 | ) | (78 | ) | (32 | ) |
| Minority interests                                               |       | 1                                                  |       | 2 |   | — |   | 12 |   | (1 | ) | — |   |
| Net income (loss)                                                |       | 656                                                |       | 1,739 |   | 1,396 |   | (12 | ) | (719 | ) | 366 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                                |       | (179                                               | )          | (474 | ) | (64 | ) | 242 |   | 203 |   | 19 |   |
| Comprehensive income (loss)                                      |       | 477                                                |       | 1,265 |   | 1,332 |   | 230 |   | (516 | ) | 385 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted earnings (loss):                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Per thousand common shares                                       |       | 4.04                                               |       | 10.73 |   | 8.61 |   | (0.07 | ) | (4.52 | ) | 2.30 |   |
| Per thousand preferred shares                                    |       | 4.04                                               |       | 10.73 |   | 8.61 |   | (0.07 | ) | (4.52 | ) | 2.30 |   |
| Per ADS                                                          |       | 4.04                                               |       | 10.73 |   | 8.61 |   | (0.07 | ) | (4.52 | ) | 2.30 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                          |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Assets                                                           |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                                   |       | 1,268                                              |       | 3,366 |   | 2,630 |   | 1,845 |   | 1,752 |   | 1,064 |   |
| Property, plant and equipment, net (in service)                  |       | 3,498                                              |       | 9,288 |   | 9,361 |   | 9,322 |   | 9,325 |   | 9,705 |   |
| Construction in progress                                         |       | 717                                                |       | 1,903 |   | 1,556 |   | 777 |   | 516 |   | 592 |   |
| Deferred regulatory assets — long-term                      |       | 1,103                                              |       | 2,929 |   | 2,069 |   | 1,670 |   | 1,245 |   | — |   |
| Account receivable from State Government                         |       | 413                                                |       | 1,097 |   | 891 |   | 755 |   | 451 |   | 953 |   |
| Other assets                                                     |       | 252                                                |       | 669 |   | 612 |   | 1,139 |   | 773 |   | 484 |   |
| Total assets                                                     |       | 7,251                                              |       | 19,252 |   | 17,119 |   | 15,508 |   | 14,062 |   | 12,798 |   |
|                                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                                      |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Current portion of long-term financing                           |       | 534                                                |       | 1,417 |   | 1,660 |   | 946 |   | 451 |   | 502 |   |
| Other current liabilities                                        |       | 895                                                |       | 2,376 |   | 1,869 |   | 2,097 |   | 1,713 |   | 1,042 |   |
| Long-term financing                                              |       | 1,036                                              |       | 2,750 |   | 2,331 |   | 2,593 |   | 2,029 |   | 1,088 |   |
| Employee post-retirement benefits-long-term                      |       | 605                                                |       | 1,606 |   | 1,023 |   | 1,091 |   | 1,475 |   | 1,803 |   |
| Shareholders’ equity                                        |       | 3,469                                              |       | 9,209 |   | 8,524 |   | 7,442 |   | 7,543 |   | 8,162 |   |
| Capital stock                                                    |       | 538                                                |       | 1,428 |   | 1,428 |   | 1,428 |   | 1,396 |   | 1,396 |   |

 

5

----

 
| ** **                                                                | ** ** | **As of and for the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                | ** ** | **(US$)****(1)**                                   | ** ** | **(In R$ or US$ as indicated,  except outstanding shares data)** | ** ** |
| **Other Data:**                                                           |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average outstanding shares — basic and  diluted (thousands) |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                                    |       | —                                             |       | 70,874,168 |   | 70,874,168 |   | 70,874,168 |   | 69,495,478 |   | 69,495,478 |   |
| Preferred                                                                 |       | —                                             |       | 91,210,523 |   | 91,210,523 |   | 91,210,523 |   | 89,436,237 |   | 89,436,237 |   |
| Dividends per thousand shares                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                                    |       | 1.35                                               |       | R$ | 3.58 |   | R$ | 1.54 |   | R$ | 2.04 |   | R$ | 0.65 |   | R$ | 1.18 |   |
| Preferred                                                                 |       | 1.35                                               |       | R$ | 3.58 |   | R$ | 1.54 |   | R$ | 2.04 |   | R$ | 0.65 |   | R$ | 1.18 |   |
| Dividends per ADS                                                         |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Preferred                                                                 |       | 1.35                                               |       | R$ | 3.58 |   | R$ | 1.54 |   | R$ | 2.04 |   | R$ | 0.65 |   | R$ | 1.18 |   |
| Dividends per thousand shares(4)                                     |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                                    |       | —                                             |       | US$ | 1.35 |   | US$ | 0.53 |   | US$ | 0.58 |   | US$ | 0.28 |   | US$ | 0.60 |   |
| Preferred                                                                 |       | —                                             |       | US$ | 1.35 |   | US$ | 0.53 |   | US$ | 0.58 |   | US$ | 0.28 |   | US$ | 0.60 |   |
| Dividends per ADS(4)                                                      |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Preferred                                                                 |       | —                                             |       | US$ | 1.35 |   | US$ | 0.53 |   | US$ | 0.58 |   | US$ | 0.28 |   | US$ | 0.60 |   |

 

----

(1)                                   Convertedat the exchange rate of US$1.00 to R$2.6550, the noon buying rate as of December 31,2004.  See “— Exchange Rates.”

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

(3)                                   SeeNote 4 to our consolidated financial statements.

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

 

## **Exchange Rates**

## ** **

Prior to March 14,2005 there were two principal foreign exchange markets in Brazil - thecommercial rate exchange market and the floating rate exchange market.  Most trade and financial foreign-exchangetransactions were carried out on the commercial rate exchange market.  The floating market rate generally applied totransactions to which the commercial market rate did not apply.  Prior to February 1999, the exchangerate in each market was established independently, resulting in different ratesduring some periods.  As of February 1,1999, the Central Bank of Brazil (Banco Central do Brazil), or the CentralBank, placed the commercial rate exchange market and the floating rate exchangemarket under identical operational limits, which led to a convergence in thepricing and liquidity of both markets.

 

On March 6,2005, the National Monetary Council (Conselho Monétario Nacional) enactedResolution No. 3,265 that, effective March 14, 2005, consolidated thetwo foreign exchange markets into one foreign exchange market for the generalpurpose of making foreign exchange transactions simpler and moreefficient.  All foreign exchangetransactions are now carried out in this single foreign exchange market throughfinancial institutions authorized to operate in the market.  Additional regulations governing the newforeign exchange market are pending approval and enactment by the Braziliangovernment.  We cannot predict the actualimpact of the enactment of such new regulations on the new foreign exchangemarket.

 

Foreign exchangerates continue to be freely negotiated, but may be influenced by Central Bankintervention.  From March 1995through January 1999, the Central Bank allowed the gradual devaluation ofthe *real* against the U.S. dollar. In January 1999,the Central Bank allowed the *real*/U.S.dollar exchange rate to float freely. Since then, the *real*/U.S.dollar exchange rate has been established mainly by the Brazilian interbankmarket and has fluctuated considerably.

 

During 2000, 2001and 2002 the *real* declined against the U.S.dollar.  Nevertheless, in 2003, the *real* appreciated significantly against the U.S. dollar dueto the adoption of new monetary and fiscal policies by the new FederalGovernment.  In 2004 and the first fourmonths of 2005, the *real* continuedto appreciate against the U.S. dollar, mostly due to the worldwide U.S. dollardepreciation and the tightening of the domestic monetary policy. In the past,the Central Bank has intervened occasionally to control unstable movements inforeign exchange rates. We cannot predict whether the Central Bank or theBrazilian government will continue to let the *real*float freely or will intervene in the exchange rate market through a currencyband system or otherwise, or that the exchange market will not be volatile as aresult of political instability or other factors. The *real*may depreciate or appreciate against the

 

6

----

 

U.S.dollar and other currencies substantially in the future. Any exchange ratefluctuations may also affect our financial condition.

 

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

 
| ** **                                | ** ** | **Reais per US$ 1.00** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| **Month**                                 | ** ** | **Low**                     | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
|                                      |       |                        |       |   |   |   |   |   |   |
| November 2004                        |       | 2.7277                      |       | 2.8630 |   | 2.7877 |   | 2.7310 |   |
| December 2004                        |       | 2.6510                      |       | 2.7800 |   | 2.7150 |   | 2.6550 |   |
| January 2005                         |       | 2.6115                      |       | 2.7227 |   | 2.6895 |   | 2.6115 |   |
| February 2005                        |       | 2.5640                      |       | 2.6310 |   | 2.5971 |   | 2.5846 |   |
| March 2005                           |       | 2.6103                      |       | 2.7755 |   | 2.7061 |   | 2.6660 |   |
| April 2005                           |       | 2.5135                      |       | 2.6572 |   | 2.5760 |   | 2.5330 |   |
| May 2005 (through May 18, 2005) |       | 2.4528                      |       | 2.5147 |   | 2.4752 |   | 2.4625 |   |

 
| ** **                       | ** ** | **Reais per US$ 1.00** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| **Year Ended December 31,** | ** ** | **Low**                     | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
|                             |       |                        |       |   |   |   |   |   |   |
| 2000                             |       | 1.7230                      |       | 1.9840 |   | 1.8301 |   | 1.9510 |   |
| 2001                             |       | 1.9380                      |       | 2.7880 |   | 2.3527 |   | 2.3120 |   |
| 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 |   |

 

----

Source: Federal ReserveBank of New York

 

Exchange ratefluctuations may affect the U.S. dollar amounts received by the holders ofADSs.  We will make any distributionswith respect to our preferred shares in *reais*and the depositary will convert these distributions into U.S. dollars forpayment to the holders of ADSs.  Exchangerate fluctuations may also affect the U.S. dollar equivalent of the *real* price of the preferred shares on theBrazilian stock exchange where they are traded. Exchange rate fluctuations may also affect our results ofoperations.  See “—Risk Factors—RisksRelating to Brazil—Exchange rate instability may adversely affect our resultsof operations and financial condition.”

 

## **Risk Factors**

## ** **

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

#### * *

## **Risks Relating to CEMIG**

## ** **

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

#### * *

As our controllingshareholder, the government of the State of Minas Gerais exercises substantialinfluence on the management and orientation of the business of CEMIG.  Further, the present Governor of the State ofMinas Gerais is a member of a party which is in opposition to the presentFederal Government.  It is not possibleto analyze the impact and effects this may have on us or our results ofoperations.

 

The government ofthe State of Minas Gerais currently holds 51% of our common shares and,consequently, has the right to the majority of votes in decisions of theGeneral Meetings of our Shareholders, and can (i) elect the majority ofthe members of the Board of Directors of CEMIG, and (ii) decide mattersrequiring approval by a specific majority of our shareholders, includingtransactions with related parties, shareholding reorganizations and the dateand payment of any dividends.

 

The operations ofCEMIG have had and will continue to have an important impact on the commercialand industrial development of the State of Minas Gerais, and on its socialconditions.  In the past, the StateGovernment

 

7

----

 

hasused, and may use in the future, its status as our controlling shareholder todecide that we should engage in certain activities and make certain investmentsaimed, principally, to promote its political, economic or social objectives andnot necessarily to meet the objective of improving our business and/oroperational results.

 

#### *We may not be able to collect a significant receivablefrom the State Government.*

#### * *

We have asignificant receivable from the State Government under the CRC AccountAgreement, which totaled R$1,097 million as of December 31, 2004.  Historically we have been facing difficultiesin collecting such receivable.  We arecurrently offsetting amounts that are due from the State under the CRC AccountAgreement against payments of dividends and interest on capital that we arerequired to pay to the State Government as our shareholder, as allowed underthe third amendment to the CRC Account Agreement.  On November 19, 2004, our Board ofDirectors unanimously approved the main terms of a fourth amendment to the CRCAccount Agreement, which includes an increase from 25% to 50% to the amount ofdividends and interest on capital due to the State that we are entitled tooffset against amounts due under the CRC Account Agreement.  This amendment is still subject to approvalby the State Government, and execution of such amendment depends on theapproval of ANEEL, our shareholders and the state congress of the State ofMinas Gerais. No assurance can be given that all such approvals will beobtained or, if obtained, that any of the installment payments under thisamendment will be paid when due or at all. Furthermore, no assurance can be given that additional loss provisionswith respect to receivable will not be recorded in future periods.  See “Item 10. Additional Information—Material Contracts—CRC Account Agreement”.

 

#### *We are subject to extensive governmental legislationand regulation.*

#### * *

The BrazilianFederal Government has been implementing policies that have a far-reachingimpact on the Brazilian power industry, in particular, the electricityindustry.  As part of the restructuringof the industry, Federal Law No. 10,848 of March 15, 2004, (“Law No. 10,848/04”or the “New Industry Model Law”) introduced a new regulatory framework for theBrazilian electricity industry.

 

Law No. 10,848/04remains subject to the implementation of resolutions by ANEEL.  Moreover, the constitutionality of Law No. 10,848/04is currently being challenged before the Brazilian Supreme Court.  The Brazilian Supreme Court has not yetreached a final decision and, therefore, Law No. 10,848/04 is currently inforce.  If all or a portion of Law No. 10,848/04is considered to be unconstitutional by the Brazilian Supreme Court, all or aportion of the regulatory scheme introduced by Law No. 10,848/04 may notcome into effect, generating uncertainty as to how and when the FederalGovernment will be able to introduce changes to the electricity industry.  Accordingly, we cannot now evaluate theimpact of the new regulation to be issued by ANEEL or the adverse impact of adecision on the constitutionality of Law No. 10,848/04 would have on ourfuture activities, results of operations and financial condition.

 

#### *Companies holding concessions for distribution ofelectricity are required to purchase all of their electricitydemand by means of public auctions.*** **We may not be able to pass onthrough our distribution rates a portion of the costs of our electricitypurchases.

#### * *

Under the NewIndustry Model Law, an electricity distributor must contract in advance,through public auctions conducted by the Electric Energy Trading Chamber (CCEE– *Câmara de Comercialização de EnergiaElétrica*), in accordance with laws determined by the Ministry ofMines and Energy, or MME, at least 100% of its forecasted electricity needs forthe following five years.  The NewIndustry Model Law establishes the conditions for passing through energypurchase volumes and prices.  If the energywe purchase in the public auctions is less than 100% of our total captiveconsumption (which excludes Free Consumers, as defined in this annual report),we may be subject to fines which have not yet been determined by ANEEL and wemay not be able to pass on the full costs of our additional energy purchases,which may be at higher prices, to our customers.  If the energy we purchase in the publicauction is more than 103% of our total captive consumption, we have to assumethe price risk of buying in the public auctions and selling in the spot market.

 

The New IndustryModel Law limits our ability to pass through the cost of electricity purchasesto our customers if our costs exceed the Annual Reference Value (*Valor Anual de Referência*) established byANEEL,

 

8

----

 

whichis based on the weighted average price paid by all distribution companies inthe public auctions for electricity from new generation undertakings to bedelivered three and five years from the date of any such auction.

 

Considering the numerousfactors that affect our electricity demand forecasts, including economic andpopulation growth, and our required purchase of energy from Itaipu in an amountdetermined by the Federal Government, we cannot assure you that our forecastedelectricity demand will be accurate and this may have an adverse effect on ourbusiness, results of operations and financial condition.

 

*New rules for the sale ofelectric energy and market conditions may affect our generation sale prices.*

 

Thecontracts by which we had initially contracted all of our generation capacitywith regulated prices (the “Initial Contracts”) began to phase out at the endof 2002 at the rate of 25% each year and we expect they will be completelyphased out in 2005.  Even if we are ableto contract all generation capacity liberated from such contracts, we are notable to predict the price at which we will be able to contract such energy.

 

Additionally,we still have capacity from undertakings yet to be operational that we areplanning to sell under the auctions for new undertakings to be held under theRegulated Contracting Environment (as defined in this annual report).  Legislation allows distributors that contractwith our generation company under the Regulated Contracting Environment toreduce the quantity contracted under these contracts until a certain limit,exposing the generation company to the risk of failing to contract this reducedenergy with adequate prices.

 

Contractswith consumers allowed to purchase energy directly from generating companies orenergy traders (generally consumers with demand equal to or greater than 3 MW,and referred to as “Free Consumers”) will also give such consumers theflexibility to purchase less energy from us than was originally contracted forby such consumers, which may adversely impact our business, results ofoperations and financial condition.

 

If we are unableto contract our remaining capacity of energy liberated from existing contractsand energy from new undertakings at adequate prices, our revenues and ourresults of operations may be adversely affected.

 

*ANEEL has substantial discretion toestablish the rates we charge.  Suchrates are determined pursuant to concession contracts entered with ANEEL and inaccordance with ANEEL’s regulatory decision-making authority.*

 

Concessionagreements and Brazilian law establish a price cap mechanism that permits threetypes of rate adjustments:  (1) theannual adjustment; (2) the periodic revision; and (3) the extraordinaryrevision.  We are entitled to apply eachyear for the annual adjustment, which is designed to offset some of the effectsof inflation on rates and pass through to customers certain changes in our coststructure that are beyond our control, such as the cost of electricity wepurchase from certain sources and certain other regulatory charges, includingcharges for the use of transmission and distribution facilities.  In addition, ANEEL carries out a periodicrevision every five years that is aimed at identifying variations in our costsas well as setting a factor based on our operational efficiency that will beapplied against the index of our ongoing annual rate adjustments, the intendedeffect of which is to reward the good management of our costs while sharing anyrelated gains with customers.  We arealso entitled to request an extraordinary revision of our rates ifunpredictable events significantly alter our cost structure.  The periodic revision and extraordinaryrevision are subject to a certain degree of ANEEL’s discretion.

 

We cannot assureyou that ANEEL will establish rates that will adequately compensate us and thatour revenues and results of operations will not be adversely affected.  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 are strictly liablefor any damages resulting from inadequate rendering of electricity services,and our contracted insurance policies may not fully cover such damages.*

#### * *

Under Brazilianlaw, we are strictly liable for direct and indirect damages resulting from theinadequate rendering of electricity services. In addition, the damages caused to end consumers as a result of interruptionsor

 

9

----

 

disturbancesarising from the generation, transmission or distribution systems, wheneverthese interruptions or disturbances are not attributed to an identifiablemember of the Operador Nacional do Sistema (National System Operator, or “ONS”)or the ONS itself, shall be shared among generation, distribution andtransmission companies.  Until a finalcriteria is defined, the liability for such damages shall be shared in theproportion of 60% to distribution agents, 20% to transmission agents and 20% togeneration agents.

 

#### *We are subject to rules andlimits applied to levels of public sector borrowing and to restrictions on theuse of certain funds we raise, which could prevent us from obtaining financing.*

#### * *

As a statecontrolled company, we are subject to rules and limits on the level ofcredit applicable to the public sector issued by the National Monetary Counciland by the Brazilian Central Bank.  Theserules set certain parameters and conditions for financial institutions tobe able to offer credit to public sector entities.  Thus, if we do not meet these conditions, wemay have difficulty in obtaining financing from Brazilian financialinstitutions, which could create difficulties in the implementation of ourinvestment plan or in refinancing our financial 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 obligationsfor which there is no other source of repayment.  As a result of these regulations, ourcapacity to incur debt is again limited, and this could negatively affect theimplementation of our investment plan or the refinancing of our obligations.

 

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

#### * *

We aresubject to certain restrictions on our ability to incur debt due to covenantsset forth in our loan agreements.  In theevent of our non-compliance with any such covenants in our loan agreements, thetotal principal, future interest and any penalties due under these agreementsmay become immediately due and payable. Early maturity of our obligations could adversely affect our financialcondition especially in light of cross default provisions in several of ourloan 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 on business, results of operations and financial condition.

 

#### *We could bepenalized 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 ourgeneration, transmission and distribution activities pursuant to concessionagreements entered into with the Brazilian 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 the non-compliance, these penalties couldinclude:

 

•                                          fines perbreach 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 Brazilian government has the power toterminate any of our concessions prior to the end of the concession term in thecase of bankruptcy or dissolution, or by means of expropriation for reasonsrelated to the public interest.

 

10

----

 

We cannot assureyou that ANEEL will not impose penalties or terminate our concessions in theevent of a breach.  Any compensation wemay receive upon the termination of the concession contract may not besufficient to compensate us for the full value of certain investments.  If any of our concession agreements areterminated and we are at fault, the effective amount of compensation could bereduced through fines or other penalties. Termination or imposition of penalties could adversely affect ourbusiness, results of operations and financial condition.

 

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

#### * *

We carry out ourgeneration, transmission and distribution activities pursuant to concessionagreements entered into with the Federal Government.  The Brazilian Constitution requires that allconcessions relating to public services be awarded through a biddingprocess.  In 1995, in an effort toimplement these constitutional provisions, the Federal Government adoptedcertain laws and regulations, known collectively as the Concessions Law,governing bidding procedures in the electricity industry.  In accordance with the Concessions Law, asmodified by the New Industry Model Law, upon application by the concessionaire,existing concessions may be renewed by the Federal Government for additionalperiods of up to 20 years without being subject to the bidding process,provided that the concessionaire has met minimum performance standards and thatthe proposal is otherwise acceptable to the Federal Government.

 

In light of thedegree of discretion granted to the Federal Government by the Concessions Lawand the concession contracts with respect to renewal of existing concessions,and given the lack of long-standing precedents with respect to the FederalGovernment’s exercise of such discretion and interpretation and application ofthe Concessions Law, we cannot assure you that new concessions will be obtainedor that concessions will be renewed on terms as favorable as those currently ineffect.  See “Item 4.  Information on theCompany—Competition—Concessions” and “The Brazilian Power Industry—Concessions”in Annex A.  In addition, it is possiblethat our large industrial clients could be authorized by ANEEL to generateelectric energy for self consumption or sale to third parties, in which casethey may obtain an authorization or concession for the generation of electricpower in a given area, which could adversely affect our results of operations.

 

Non-renewal of ourconcessions could adversely affect our business, results operations andfinancial condition.

 

#### *The presentstructure of the Brazilian electricity sector is highly concentrated inhydroelectric generation, which makes it subject to certain risks.*

#### * *

The Brazilianelectricity industry, highly concentrated in hydroelectric generation, faces anatural limitation to its generation capacity. Hydroelectric power plants cannot generate more electricity than is madepossible by the country’s water resources. Natural factors could affect our generating capacity, by increasing orreducing the level of reservoirs. Control of the level of reservoirs by the ONS seeks to optimize thelevel of water available for hydroelectric generation in each of the powerplants associated with the respective reservoirs.  In this context, the ONS could, for example,prevent a generating plant located at the beginning of a river from increasingits throughput of water, if this were to negatively affect the other plantsfurther down the same river.  In the sameway, the ONS may decide to increase thermal generation and reduce hydrogeneration in order to conserve water in the reservoirs.

 

Periods of droughtcould lead to a reduction of the hydro generating capacity, thus obliging us tobuy energy in the wholesale market to meet the selling contracts we havemade.  Shortages and/or rationing due tobad hydrological conditions could result in a reduction of revenue and reducedcash flow.  Any limitation on ourelectricity generation capacity could adversely affect our business, results ofoperations and financial condition.

 

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

#### * *

We are currentlyengaged in the construction of additional hydroelectric plants and theevaluation of other potential expansion projects.  Our ability to complete an expansion projecton time, within a determined budget and without adverse economic effects, issubject to a number of risks.  Forinstance:

 

11

----

 

•                                          we mayexperience problems in the construction phase of an expansion project;

 

•                                          we may faceregulatory or legal challenges that delay the initial operation date of anexpansion project;

 

•                                          our new ormodified facilities may not operate at designated capacity or may cost more tooperate than we expect;

 

•                                          we may not beable to obtain adequate working capital to finance our expansion projects; and

 

•                                          we mayencounter environmental issues and claims by the local population during powerplant construction.

 

If we experience these orother problems relating to the expansion of our electricity generation,transmission or distribution capacity, our ability to sell electric energy inamounts in line with our projections may be harmed and we may be exposed toincreased costs.  Consequently, we mayfail to produce the revenues we anticipate in connection with such expansionprojects.

 

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

#### * *

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

 

Non-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 restrictingrights, and even imprisonment, may be applied to individuals (includingmanagers of legal entities), and penalties such as fines, restriction of rightsor community service may be applied to legal entities.  With respect to administrative sanctions,depending on the circumstances, the environmental authorities may impose warningsand fines, require partial or total suspension of activities; suspend orrestrict tax benefits or cancel or suspend financing lines from governmentallending establishments as well as prohibit the entity from contracting withgovernmental agencies, companies and authorities.  Any of these events could adversely affectour business, results of operations or financial condition.

 

#### *Our level ofconsumer default could adversely affect our business, results of operations andfinancial condition.*

#### * *

As of December 31, 2004, our total past due receivables from finalconsumers were approximately R$596 million, corresponding to 7.7% of our netrevenue for 2004.  Approximately 13.4% ofthe past due receivables were owed by entities in the public sector.  We may be unable to recover debts fromseveral municipalities and other defaulting clients which are beingrenegotiated.  If these debts are nottotally or partially recovered, we will experience an adverse impact on ourbusiness, results of operations and financial condition.

 

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

#### * *

Weplan to spend approximately R$6.4 billion during the period from 2005 through2009 on the construction of new power installations and the refurbishment andmaintenance of existing power plants and transmission and distributionsystems.  Our ability to carry out thiscapital expenditure program is dependent upon a number of factors, includingour ability to charge adequate rates for our services, our access to domesticand international capital markets and a variety of operating and otherfactors.  In addition, our plans toexpand our generation and transmission capacity are subject to the competitivebidding process governed by the Concessions Law.  We cannot give you any assurance that we willhave the financial resources to complete this program.

 

*Ourability to distribute dividends is subject to limitations.*

 

12

----

 

Whetheror not you receive a dividend depends on the amount of the mandatorydistribution required under our bylaws, whether our financial condition permitsus to distribute dividends under Brazilian law, and whether our shareholders,on the recommendation of our Board of Directors acting in its discretion, determinethat our financial condition warrants a suspension of the distribution ofdividends.

 

Becausewe are a holding company with no revenue-producing operations other than thoseof our subsidiaries, we will be able to distribute dividends to shareholders onlyif we receive dividends or other cash distributions from our subsidiaries.

 

#### *Our investment in the telecommunications sector maynot have the return we expect.*

#### * *

Empresa de Infovias S.A., our telecommunicationssubsidiary, began operations in January 2001 and its subsidiary, WAY TVBelo Horizonte S.A., or WAY TV, began operations in 2002.  We consider these businesses to be astrategic use of our existing infrastructure. The telecommunications business will require additional investments tobe considered complete and competitive. We perform periodic evaluations of Empresa de Infovias S.A. and WAY TV,in order to determine their ability to run their businesses on a stand-aloneand profitable basis, as well as to determine the need for an impairment reservefor this investment.  Although currentlyavailable projections do not indicate a need for an impairment reserve, we cannot assure that such an impairment reserve will not be required or that ourinvestment in the telecommunications sector will not have an adverse impact onour financial condition.

 

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

#### * *

We donot have general third party liability insurance covering accidents and havenot asked for bids relating to this type of insurance.  However, we may contract for this type ofinsurance in the future.  In addition, wehave not asked for bids for, nor do we carry, insurance coverage for major catastrophesaffecting our facilities such as earthquakes and floods, for businessinterruption risk or for operating system failures.  Accidents or catastrophic events mayadversely affect our business, results of operations or financialcondition.  See “Item 10.  Additional Information—Insurance.”

 

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

#### * *

On December 31,2004, our total debt was R$4,167 million, of which R$1,417 million matures in2005.

 

Wewill need funds in the short term to pay and refinance these obligations.  For this reason, we intend to refinance ourdebt profile in 2005 to lengthen maturities. We plan to raise approximately R$1.5 billion in 2005.

 

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

 

13

----

 

*Weare exposed to foreign exchange rate risk.*

 

As of December 31, 2004, approximately 26.9% of ourtotal indebtedness was denominated in currencies other than the *real*(76.6% in U.S. dollars). If the U.S. dollar/*real*exchangerate appreciates, our financing expenses will increase and our results ofoperations and financial condition could be adversely affected.  While 37.0% of our debt denominated inforeign currencies is subject to currency swaps that convert our foreigncurrency obligations into *reais* in order mitigate this risk, we cannotassure you that these hedging arrangements will be sufficient to avoid anadverse effect on our business, results of operations and financial conditionin case of unfavorable exchange rate fluctuations.

 

#### *We may incur losses in connection with pendinglitigation and arbitration.*

#### * *

We arecurrently defending several legal proceedings relating to civil, administrative,environmental, tax and other claims. These claims involve a wide range of issues and seek substantial amountsof money.  Several individual disputesaccount for a significant part of the total amount of claims against us.  Our consolidated financial statements includereserves relating to litigation and arbitration claims totaling R$303 millionas of December 31, 2004 (excluding labor-related matters) for probable andreasonably estimable losses and expenses we may incur in connection withpending litigation.  In the event thatour reserves for litigation and arbitration claims prove to be insufficient,the payment of litigation claims in an amount in excess of the reserved amountscould have an adverse effect on our business, results of operations orfinancial condition.

 

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

#### * *

Substantiallyall of our employees are covered by Brazilian labor legislation applicable toprivate sector employees.  We haveentered into a collective bargaining agreement with the labor unionsrepresenting most of these employees.

 

We arecurrently defending a number of labor-related claims brought by our employeesthat generally relate to overtime and hazardous occupation compensation.  As of December 31, 2004, these employeeswere seeking, in the aggregate, approximately R$138.5 million in compensation,and at that date we had accrued a liability of approximately R$110.8 millionfor losses we expect from these claims.****For a more detailed discussion oflabor-related proceedings, see “Item 8. Financial Information—Legal Proceedings—Labor and Pension FundObligations.”

 

Wehave not experienced any material labor unrest during the last four years.  Nevertheless, our operations might beinterrupted by a labor disturbance in the future.  We do not carry insurance for losses incurredas a result of business interruptions caused by labor action.  In the event of a strike, we might face animmediate loss of revenue.

 

Contractdisputes, strikes, legal claims or other types of conflicts relating to ouremployees or the labor unions that represent them may have an adverse effect onour business, results of operations or financial condition and our ability tomaintain ordinary service levels or otherwise operate our business in themanner that our customers expect.

 

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

#### * *

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

 

14

----

 

#### *Effective control of CEMIG is subject to judicialchallenge.*

#### * *

In connection withthe purchase in 1997 of approximately 33% of our common shares by SouthernElectric Brasil Participações Ltda., or Southern, the State Government enteredinto a shareholders’ agreement with Southern, granting Southern control overcertain significant corporate decisions. In 1999, the State Government filed a lawsuit seeking to nullify theshareholders’ agreement on constitutional grounds.  In August 2001, after several rulingsand appeals, the Minas Gerais State Court of Appeals ruled that theshareholders’ agreement is null and void. In December 2003, this ruling was appealed to the Superior Tribunalde Justiça (Superior Court of Justice), which upheld the Minas Gerais StateCourt of Appeals ruling.  The decision ofthe Superior Court of Justice is subject to request for amendment and thereforethe effective control of CEMIG remains subject to further judicial challenge inthe Supreme Court (Supremo Tribunal Federal). As a result, Southern could retroactively challenge the legitimacy ofcertain decisions taken by our Board of Directors while these legal proceedingsare pending.  See “Item 8.  Financial Information—LegalProceedings—Shareholders’ Agreement” and “Item 10.  Additional Information—MaterialContracts—Shareholders’ Agreement, dated June 18, 1997, between the StateGovernment and Southern.”

 

## **Risks Relating to Brazil**

## ** **

#### *The Braziliangovernment exercises a significant influence on the Brazilian economy.  Political and economic conditions can have adirect impact on our business.*

#### * *

The Braziliangovernment intervenes frequently in the country’s economy, in monetary, fiscaland regulatorypolicy.  Our business, results ofoperations or financial condition may be adversely affected by changes ingovernment policies, and also by:

 

•                                          fluctuationsin the exchange rate;

 

•                                          inflation;

 

•                                          instabilityof prices;

 

•                                          changes ininterest rates;

 

•                                          fiscalpolicy;

 

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

 

•                                          control oncapital flow; and

 

•                                          limits onforeign trade.

 

Measuresby the Brazilian government to maintain economic stability, and alsospeculation on any future acts of the government, can generate uncertainties inthe Brazilian economy and increased volatility in the domestic capital markets,adversely affecting our business, results of operations or financialcondition.  If the political and economicsituations deteriorate, we may face increased costs.

 

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

 

Brazil has in the past experienced extremely high rates ofinflation. Inflation, and some of the Brazilian government’s measures taken inan attempt 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

 

15

----

 

heightened volatility in theBrazilian securities market.  Accordingto the *Índice Nacional de Preços ao Consumidor Amplo*,or IPCA, a consumer price index, the Brazilian annual inflation rates were12.5%, 9.3% and 7.6% in 2002, 2003 and 2004, respectively.  No assurance can be given that inflation willremain at these levels.

 

Future measures taken by the Brazilian government,including interest rate increases, intervention in the foreign exchange marketand actions to adjust or fix the value of the *real*may trigger increases in inflation, and consequently, have adverse economicimpacts on our business, results of operations and financial condition.  If Brazil experiences high inflation in thefuture, we may not be able to adjust the rates we charge our customers tooffset the effects of inflation on our cost structure.

 

Substantially all of our cash operating expenses aredenominated in *reais* and tend to increase withBrazilian inflation. Inflationary pressures may also hinder our ability toaccess foreign financial markets or may lead to further government interventionin the economy, including the introduction of government policies that couldharm our business, results of operations and financial condition or adverselyaffect the market value of our preferred shares and as a result, our ADSs.

 

*Exchange rate instability mayadversely affect our business, results of operations and financial conditionand the market price of the ADSs and our preferred shares.*

 

The Brazilian currency has been devalued periodicallyduring the last four decades. Throughout this period, the Brazilian governmenthas implemented various economic plans and utilized a number of exchange ratepolicies, including sudden devaluations, periodic mini-devaluations duringwhich the frequency of adjustments has ranged from daily to monthly, floatingexchange rate systems, exchange controls and dual exchange rate markets.Although over long periods depreciation of the Brazilian currency generally hascorrelated with the rate of inflation in Brazil, devaluation over shorterperiods has resulted in significant fluctuations in the exchange rate betweenthe Brazilian currency and the U.S. dollar and currencies of other countries.

 

The *real*depreciatedagainst the noon buying U.S. dollar by 9.3% in 2000 and by 18.7% in 2001. In2002, the *real* depreciated 52.3%against the U.S. dollar, due in part to political uncertainty surrounding theBrazilian presidential elections and the global economic slowdown. Although the*real*appreciated 18.25% againstthe U.S. dollar in 2003 and a further 8.1% in 2004, no assurance can be giventhat the real will not depreciate against the U.S. dollar again.  On May 18, 2005, the noon buying U.S.dollar*/real* exchange rate wasR$2.4625 per U.S.$1.00.  See “—Exchange Rates”.

 

There are no guarantees that the exchange rate between the *real* and the U.S. dollar will stabilize atcurrent levels. Although we have managed our existing U.S. dollar debtobligations in order to protect against fluctuations in the dollar/*real*exchange rate, we could in the futureexperience monetary losses relating to these fluctuations. See “Item 11. —Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk”for information about our foreign exchange risk hedging policy.

 

Depreciationsof the *real*relative to the U.S.dollar also create additional inflationary pressures in Brazil that maynegatively affect us.  Currencydepreciations generally curtail access to foreign financial markets and mayprompt government intervention, including recessionary governmentalpolicies.  Currency depreciations alsoreduce the U.S. dollar value of distributions and dividends on the ADSs and theU.S. dollar equivalent of the market price of preferred shares and, as aresult, the ADSs. On the other hand, appreciation of the real against the U.S.dollar may lead to deterioration of the country’s current account and thebalance of payments, as well as to a dampening of export-driven growth.

 

*Changes in economic and market conditions in other countries, especiallyLatin American and emerging market countries, may adversely affect ourbusiness, results of operations and financial condition, as well as the marketprice of our preferred shares and ADSs.*

 

The market value of securities of Brazilian companies is affectedto varying degrees by economic and markets conditions in other countries,including other Latin American and emerging market countries. Although economicconditions in such countries may differ significantly from economic conditionsin Brazil, investors’

 

16

----

 

reactions to developments in theseother countries may have an adverse effect on the market value of securities ofBrazilian issuers. Crises in other emerging market countries may diminishinvestor interest in securities of Brazilian issuers, including us. This couldalso make it more difficult for us access the capital markets and finance ouroperations in the future on acceptable 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.

 

## **Risks Relating to thePreferred Shares and ADSs**

## ** **

#### *The preferred shares and ADSs generally do not havevoting rights.*

#### * *

Inaccordance with the Brazilian Corporate Law and our by-laws, holders of thepreferred shares, and, by extension, holders of the ADSs, are not entitled tovote at our shareholders’ meetings, except in very limited circumstances.  Holders of ADSs may also encounterdifficulties in the exercise of certain rights, included limited votingrights.  Under some circumstances, suchas failure to provide the depositary with voting materials on a timely basis,holders of ADSs may not be able to vote by instructing the depositary.

 

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

#### * *

Youmay be adversely affected by the imposition of restrictions on the remittanceto foreign investors of the proceeds of their investments in Brazil and theconversion of *reais* into foreigncurrencies.  The Federal Governmentimposed remittance restrictions for approximately three months in late 1989 andearly 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 intoU.S. dollars and the remittance of U.S. dollars abroad.  We cannot assure you that the FederalGovernment will not take similar measures in the future.  See “Item 3.  Key Information—Exchange Rates.”

 

#### *Exchanging ADSs for the underlying preferred sharesmay have unfavorable consequences.*

#### * *

TheBrazilian custodian for the preferred 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 shares and sales proceeds related thereto.  If you decide to exchange your ADSs for theunderlying preferred shares, you will be entitled to continue to rely, for fivebusiness days from the date of the exchange, on the depositary bank’selectronic certificate of registration. Thereafter, you may not be able to obtain and remit U.S. dollars abroadupon the disposition of the preferred shares, or distributions relating to thepreferred shares, unless you obtain your own certificate of registration underResolution 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 notobtain this certificate, you will be subject to less favorable tax treatment ongains with respect to the preferred shares. If you attempt to obtain your own certificate of registration, you mayincur expenses or suffer significant delays in the application process.  Obtaining a certificate of registrationinvolves generating significant documentation, including completing and filingvarious electronic forms with the Central Bank and the *Comissão de Valores Mobilíarios* (the Braziliansecurities regulatory body), or the CVM. In order to complete this process, the investor will usually need tohave a consultant or attorney who has expertise in Central Bank and CVMregulations.  Any delay in obtaining thiscertificate could adversely impact your ability to receive dividends ordistributions relating to the preferred shares abroad or the return of yourcapital in a timely manner.  If youdecide to exchange your preferred shares back into ADSs once you haveregistered your investment in the preferred shares, you may deposit yourpreferred shares with the custodian and rely on the depositary bank’scertificate of registration, subject to certain conditions.  See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”

 

Wecannot assure you that the depositary bank’s certificate of registration or anycertificate of foreign capital registration obtained by you may not be affectedby future legislative 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.

 

17

----

 

#### *The r*elative volatility and illiquidity of theBrazilian securities market may adversely affect our shareholders.

#### * *

Investingin Latin American securities, such as the preferred shares or the ADSs,involves a higher degree of risk than investing in securities of issuers fromcountries with more stable political and economic environments and suchinvestments are generally considered speculative in nature.  These investments are subject to certaineconomic and political risks, such as, among others:

 

•                                          changes tothe 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.

 

TheBrazilian securities market is substantially smaller, less liquid, moreconcentrated and more volatile than major securities markets in the UnitedStates.  This may substantially limityour ability to sell the preferred shares underlying your ADSs at a price andtime 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$241.8 billion as of December 31, 2004and an average monthly trading volume of approximately US$9.5 billion for2004.  In comparison, the New York StockExchange, Inc., or the NYSE, had a market capitalization of US$19.8trillion as of December 31, 2004 and an average monthly trading volume ofapproximately US$968.2 billion for 2004.

 

Thereis also significantly greater concentration in the Brazilian securities marketthan in major securities markets in the United States.  The ten largest companies in terms of marketcapitalization represented approximately 66.9% of the aggregate marketcapitalization of the São Paulo Stock Exchange as of December 31,2004.  The top ten stocks in terms oftrading volume accounted for approximately 49.5% of all shares traded on theSão Paulo Stock Exchange in 2004.  See “Item9.  The Offer and Listing—Trading Market.”

 

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

#### * *

Underthe Brazilian Corporate Law and our by-laws, we must pay our shareholders amandatory distribution equal to at least 50% of our adjusted 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.  Inaddition, our by-laws require us to pay holders of our preferred shares annualdividends equal to the greater of 10% of the par value of our shares or 3% ofthe book value of our shares.  If we donot have 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 StateGovernment, our controlling shareholder, a minimum annual dividend of 6% of parvalue would in any event be payable to all holders of common shares andpreferred shares issued up to August 5, 2004 (other than public andgovernmental holders) in the event that mandatory distributions were not madefor a fiscal year.  See “Item 8.  Financial Information—Dividend Policy andPayments” for a more detailed discussion.

 

#### *Holders of theADSs and holders of preferred shares have less well-defined shareholders’rights than holders of shares in U.S. companies.*

#### * *

Ourcorporate governance, disclosure requirements and accounting standardsapplicable to Brazilian companies are governed by our by-laws and by theBrazilian Corporate Law, which may differ from the legal principles that wouldapply if we were incorporated in a jurisdiction in the United States, such asDelaware or New York, or in other jurisdictions outside Brazil.  Your rights to protect your interestsrelative to actions taken by our Board of Directors or by our controllingshareholder may be less well defined and less well supported by established rules andjudicial precedents than under the laws of certain jurisdictions outsideBrazil.

 

AlthoughBrazilian law imposes restrictions on insider trading and price manipulation,the Brazilian securities market is not as highly regulated and supervised asthe U.S. securities market or markets in certain other

 

18

----

 

jurisdictions.  In addition, rules and policies againstself-dealing and regarding the preservation of shareholder interests are lessdeveloped and enforced in Brazil than in the United States, potentiallydisadvantaging holders of the preferred shares and ADSs.

 

#### *Shares eligible for future sale may adversely affectthe market price of the preferred shares and the ADSs.*

#### * *

Salesof a substantial number of shares or the perception that such sales could takeplace could adversely affect the prevailing market price of the preferredshares and ADSs.  As a consequence of theissuance of new shares or sales by existing shareholders, the market price ofthe preferred shares and, by extension, the ADSs, may decrease significantly.

 

#### *You may not be able to exercise preemptive rights withrespect to the preferred shares.*

#### * *

Youmay not be able to exercise the preemptive rights relating to the preferredshares underlying your 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.  Weare not obligated to file a registration statement with respect to the sharesrelating to these preemptive rights, and we cannot assure you that we will fileany 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 andHistorical Background**

## ** **

Wewere organized in Minas Gerais, Brazil on May 22, 1952 as a *sociedade de economia mista* (astate-controlled mixed capital company) with limited liability and indefiniteduration, pursuant to Minas Gerais State Law No. 828 of December 14,1951 and its implementing regulation, Minas Gerais State Decree 3,710 of February 20,1952.  Our full legal name is CompanhiaEnergética de Minas Gerais–CEMIG, but we are also known as CEMIG.  Our headquarters are located at Avenida Barbacena,1200, Belo Horizonte, Minas Gerais, Brazil. Our main telephone number is (55-31) 3299–3711.

 

In order to comply with legal andregulatory provisions pursuant to which we were required to unbundle ourvertically integrated businesses, we have 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.  CemigGeneration and Transmission and CemigDistribution were created to carry out the activities of generation andtransmission, and distribution, respectively.

 

On August 4, 2004 the State ofMinas Gerais issued Law 15,290 governing the corporate restructuring ofCEMIG.  Subsequently, ANEEL, byResolution 407/2004 dated December 23, 2004, approved our proposal fortransfer of the concessions, assets and liabilities to the two new companiescreated, with CEMIG being maintained as a holding company.  On December 30, 2004, an extraordinarygeneral shareholders’ meeting of CEMIG authorized the transfer of assets andliabilities of CEMIG to the two wholly-owned subsidiaries – Cemig Generationand Transmission and Cemig Distribution. On the same date, extraordinary general shareholders’ meetings of CemigGeneration and Transmission and of Cemig Distribution were held and approvedcapital increases of such subsidiaries. Pursuant to such shareholders’ meetings, CEMIG subscribed newly issuedshares of each such subsidiaries, which shares were paid in with assets ofCEMIG. As a consequence of this process, the assets and liabilities of thegeneration and transmission assets and distribution assets, were transferred toCemig Generation and Transmission and Cemig Distribution, respectively.  Cemig Generation and Transmission and CemigDistribution began their operations on January 1, 2005.

 

The following chart shows ourcorporate structure as of May 18, 2005:

 

19

----

 

 

Through our subsidiaries, we arethe largest integrated concessionaire of electric power generation,transmission and distribution in Brazil. We operate our generation, transmission and distribution businessespursuant to concession agreements with the Federal Government.  Until 1997, we had individual concessions foreach of our generation facilities and for various regions within ourdistribution area.  On July 10,1997, we entered into new concession agreements with ANEEL that consolidatedour various generation concessions into one agreement and our several distributionconcessions into four distribution concessions covering the northern, southern,eastern and western regions of Minas Gerais. On the same date, we also entered into a new concession agreement withANEEL with respect to our transmission operations.  In connection with the unbundling, our concessions will betransferred to Cemig Generation and Transmission andCemig Distribution, although we cannot assure you of the timing of thattransfer as it will be determined by ANEEL.

 

At December 31,2004,  we generated electricity at 47hydroelectric plants,  fourthermoelectric plants and one wind farm, and had a total installed capacity of5,949 MW.  At the same date, we owned andoperated 3,017 miles of transmission lines and 238,309 miles of distribution lines.  We hold concessions to distribute electricityin 96.7% of the territory of Minas Gerais.

 

TheBrazilian electricity industry has undergone extensive regulatory restructuringas a result of which our electric generation, transmission and distribution businesseshave been and will continue to be subjected to increased competition.  For a more detailed description of regulatorychanges that affect our business, see “The Brazilian Power Industry” inAnnex A.

 

Pursuantto Minas Gerais state legislation, our by-laws were amended in 1984 to allow usto participate in an expanded range of activities relating to the energy sectorthrough separate companies.  In 1986, wecreated *Companhia de Gás de Minas Gerais*—GASMIG,or Gasmig, as a subsidiary to undertake the distribution of natural gas throughpipelines located in Minas Gerais.  In December 2004 we solda 40% stake in Gasmig to Petrobras Gás S.A – Gaspetro, or Gaspetro, and TSSParticipações S.A, or TSS, both of which are wholly-owned subsidiaries ofPetrobras S.A, for approximately R$154 million. See “Item 10.  AdditionalInformation—Material Contracts—Gasmig Shareholders Agreement andAssociation Agreement.”

 

AdditionalMinas Gerais state legislative changes enacted in 1997 authorized us toparticipate in non-energy activities that can be carried out using ouroperating assets.  In January 1999,we incorporated *Empresa de Infovias S.A.*,a telecommunication service provider, as a joint venture with *AES Força Empreendimentos Ltda.*, part ofthe AES Corporation Group.  In 2002, wepurchased *AES Força Empreendimentos Ltda.*’sinterest in Empresa de

 

20

----

 

Infovias S.A.  We also provide consulting services and haveentered into consulting agreements with electricity companies in severalcountries.

 

## **Brazil’s Energy Market**

## ** **

#### *General*

#### * *

Traditionally, in the Brazilian electricity sector,generation, transmission and distribution activities are separated, butconducted by a small number of companies that had always been the property ofeither the Federal Government, or of governments of Brazil’s individualstates.  In the last ten years, severalcompanies controlled by the state were privatized, in an effort to increaseefficiency and competition.  The previousadministration stated its objective to privatize the state-controlled part ofthe electricity sector, but the present administration has stopped thisprocess, and moved in a new direction toward implanting a “New Model” for theBrazilian electricity sector as set forth in Law No. 10,848, of March 15,2004.

 

#### *The New Model*

#### * *

The main objectives****of the new model are to guarantee:  (i) security of supply; and (ii) reasonableness****of rates.  To guarantee supply, the new model createsthe requirements (a) that distributors must contract their entire load,and will be responsible for making realistic projections of demand requirementsand (b) that building new hydroelectric and thermal plants will bedetermined in ways that best balance security of supply and reasonableness ofrates.  The means of achievingreasonableness of rates are to be the following:  (a) all purchases of electricity bydistributors are to be by auction, on the lowest-rate criterion; (b) contractingis to be through the Pool system, as described below; and (c) contractingof load will be separated into two types of transactions, both of which willalways be by auction: (i) contracting of the electricity of the newplants, which will target expansion; and (ii) contracting of theelectricity of the existing plants, which will target the existing electricitydemand.

 

The new model also creates two environments for the contracting****ofelectricity supply:  (i) theRegulated Contracting Environment (ACR), for contracting of electricity to meetthe demands of distributors supplying captive consumers under regulated rates;and (ii) the free contracting environment (ACL), for contracting of energyto supply Free Consumers, through freely negotiated contracts.  Distributors will be allowed to operate onlyin the regulated environment, while generators may operate in both, maintainingtheir competitive characteristic.

 

Expansion of the sector****will be executed by the concession-grantingpower.  Two new institutional agents havebeen created: (i) the Energy Research Company (EPE), a state-controlledcompany responsible for execution of the planning of expansion of generationand transmission; and (ii) the Electricity Trading Chamber (CCEE), aprivate company, which is the successor of the Wholesale Energy Market, and isresponsible for management of the joint contracting of electricity to meet theneeds of regulated consumers (the “Pool” system).

 

#### *Regulation under the newmodel*

#### * *

TheBrazilian electricity industry is regulated by ANEEL.  After the enactment of Law No. 10,848,ANEEL’s primary responsibility is to regulate and supervise the power industryin line with the policy to be dictated by the MME and to respond to matterswhich are delegated to it by the Brazilian government and by the MME.  ANEEL’s current responsibilities include,among others, (i) administering concessions for electricity generation,transmission and distribution activities, including the approval of electricityrates, (ii)  enacting regulations for the electricity industry, (iii) implementingand regulating the exploitation of hydroelectric resources, (iv) promotingthe public bidding process for new concessions, (v) settlingadministrative disputes among electricity generation entities and electricitypurchasers and (vi) defining the criteria and methodology for thedetermination of transmission rates.

 

#### *Rates*

#### * *

Electric energy rates inBrazil are set by ANEEL, which has the authority to readjust and review ratesin accordance with the provisions under the relevant concession contracts.  Each distribution company’s concessioncontract provides for an annual rate adjustment (*reajuste anual*).  Ingeneral, Parcel A costs are fully passed through

 

21

----

 

to consumers. Parcel A costs are the portion of the regular rate calculation formula,which provides for the recovery of certain costs that are not within thecontrol of the distribution company. Parcel B costs, which are costs that are under the control of thedistributors, are restated for inflation in accordance with the General MarketPrice Index (Indice Geral de Preços do Mercado), or IGP-M index.

 

As part of our annualrate adjustment ANEEL, through Resolution No. 83 dated as of April 7,2004, provided for an average increase in the rates that we can charge endusers from April 2004 until April 2005.  In May 2004, ANEEL re-issued Resolution No. 83and revised the basis for such average increase which resulted in lower rates.On April 6, 2005, through Resolution No. 87 ANEEL established anaverage rate adjustment of 23.88%. This adjustment includes a component of1.67% representing an increase to recoup revenue we did not achieve in 2004 dueto the lower rates under Resolution No. 83 as re-issued.

 

Concessionaires ofelectricity distribution are also entitled to periodic revisions (*revisão periódica*) every few years.  These revisions are aimed at (i) assuringnecessary revenues to cover efficient Parcel B operational costs and adequatecompensation for investments deemed essential for the services within the scopeof each such company’s concession and (ii) determining the X factor, whichis calculated based on expected productivity gains from increases in scale,evaluations by consumers (verified by ANEEL) and labor costs.

 

OnApril 8, 2003, we went through our first periodic rate revision and ANEELestablished a 31.53% temporary average increase to be applied to ourrates.  On April 4, 2005, throughResolution No. 71, ANEEL reconsidered such decision and established a44.41% average increase to be applied to our rates.  In order to guarantee low rates to our endconsumers, ANEEL only allowed us to reposition our rates up to 31.53%retroactive to April 8, 2003.  ANEELhas also indicated that the rate adjustments expected for the years from 2004to 2007 will be adjusted to recover the difference between the average rateincrease of 44.41% we were entitled to and the 31.53% rate adjustment that wasauthorized.  On April 8, 2005 ourrate adjustment increase included a portion of the difference related to thedifference between the average rate increase we were entitled to in 2004 andthe rate adjustment authorized for that year.

 

In addition,concessionaires of electricity distribution are entitled to extraordinaryreview of rates (*revisão extraordinária*),on a case by case basis, to ensure their financial equilibrium and compensatethem for unpredictable costs, including taxes, that significantly change theircost structure.

 

ANEEL has also issuedregulations that govern the access to the distribution and transmissionfacilities and establish the rate for use of the local distribution grid, orDistribution Usage Rates (“TUSD”), and the rate for the use of theinterconnected transmission grid, or Transmission Usage Rates (“TUST”).  The rates to be paid by distributioncompanies, generators and independent customers for use of the interconnectedpower system are reviewed annually.  Thereview of the TUST takes into account the revenues that are permitted oftransmission concessionaires pursuant to their concession contracts.  For more detailed information regarding therate-setting structure in Brazil, see “The Brazilian Power Industry—Rates forthe Use of the Distribution and Transmission Systems” in Annex A.

 

#### *Concessions*

#### * *

Underthe Brazilian Constitution, companies seeking to construct or operate ageneration, transmission or distribution facility in Brazil are required toapply for an authorization or a concession from the Federal Government which isgenerally granted through a public bidding process conducted by ANEEL.  Concessions grant exclusive rights togenerate electricity in a particular plant, and to transmit or distributeelectricity in a particular area for a specified period of time, generally 35years for new generation concessions, 30 years for new transmission and distributionconcessions, and 20 years for the renewal of existing concessions.  For more detailed information regardingconcessions, see “The Brazilian Power Industry—Concessions” in Annex A.

 

#### *Land Acquisition*

#### * *

Theconcessions granted to us by the Federal Government do not include a grant ofthe land upon which the plants are located. Electricity concessionaires in Brazil typically have to negotiate withthe individual

 

22

----

 

landowners to obtainneeded land.  However, in the event thata concessionaire is unable to obtain needed land in this way, such land may becondemned for the concessionaire’s use through specific legislation.  In cases of governmental condemnation, theconcessionaires may have to participate in negotiations relating to the amountof compensation with landowners and the resettlement of communities to otherlocations.  Our resettlement policy hasgenerally resulted in the settlement of condemnation disputes.

 

**Unbundlingunder the New Industry Model**

 

Law No. 10,848/04,which provides for the new industry model, prohibits holders of distributionconcessions, permissions or authorizations that operate in the interconnectedpower system from:  (i) performingactivities related to generation, transmission and sale of energy to FreeConsumers at freely negotiated prices; (ii) holding interest in othercompanies, directly or indirectly, other than (a) in companies whosecorporate purpose is to manage financial resources necessary for rendering ofservices or (b) as provided in the concession contracts; or (iii) performingactivities outside their corporate purpose, except as provided by law and theconcession contracts.  These restrictionsdo not apply to distributors:  (i) supplyingenergy to isolated electricity systems; (ii) supplying their own market,provided such market has a demand of less than 500 GWh/year and the totality ofenergy produced is destined to such market; or (iii) when funding,investing or borrowing funds destined to the distributor itself or a company ofthe same economic group, subject to prior agreement by ANEEL.  Similarly, holders of generation concessionsor authorizations that operate in the interconnected system may not beaffiliates or controlling shareholders of companies which are responsible fordistribution activities.

 

Holdersof concessions, permissions and authorizations for generation and distributionhave 18 months in which to adapt to the rules for unbundling referred toabove, from the date of publication of Law No. 10,848/04 – that is, until September 2005.  ANEEL may extend this period once, for 18months, if the concessionaire is unable to comply with the requirements forreasons beyond its control.

 

Inorder to comply with regulatory provisions pursuant to which we were requiredto unbundle our vertically integrated businesses, we have incorporated twowholly-owned subsidiaries of CEMIG – CemigGeneration and Transmission. and CemigDistribution – createdto carry out the activities of electricity generation and transmission, anddistribution, respectively.  For moredetailed information regarding these entities and the corporate restructuringof CEMIG, see “—Organization and Historical Background.”

 

## **Unbundling in theConcession Contracts**

## ** **

Theobligation to implement the unbundling of the generation, transmission anddistribution activities in separate operational companies was already providedfor in several concession contracts. According to such contracts, the corporate reorganization should havebeen concluded by December 31, 2000, but we failed to comply with thisdeadline.

 

As aresult of such non-compliance, ANEEL imposed a fine of R$3.7 million on us atthe beginning of 2001, which we contested, achieving not only its cancellationby ANEEL, but also a new deadline for completing the corporate reorganization,namely September 21, 2002.  Since wealso failed to complete the process by the new deadline, ANEEL imposed anotherfine on us, of R$5.5 million, on November 11, 2002.  On April 3, 2003 we appealed this fine,applying for its suspension.  On February 23,2005, ANEEL issued a ruling reducing the fine to R$2.7 million.  We continue to contest this fine.  No reserve has been recorded for thispotential claim since we believe we have a meritorious defense against this andany other possible penalties that may be imposed regarding this matter.  We believe ANEEL is likely to analyze theseproceedings taking into consideration the new regulations of the electricityindustry, so that in practice, it is unlikely that there is going to be anoutcome before September 2005.

 

## **Capital Expenditures**

## ** **

Capitalexpenditures for the years ended December 31, 2004, 2003 and 2002, inmillions of *reais*, are as follows:

 

23

----

 
| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Empresa de Infovias S.A. equity  acquisition                          |       | —                           |       | — |   | 87 |   |
| Others                                                                |       | 10                               |       | 4 |   | 16 |   |
| Total capital expenditures under affiliates                           |       | 10                               |       | 4 |   | 103 |   |
| Generation power projects — under Property, plant  and equipment |       | 679                              |       | 594 |   | 413 |   |
| Transmission network expansion                                        |       | 59                               |       | 97 |   | 59 |   |
| Distribution network expansion                                        |       | 245                              |       | 263 |   | 278 |   |
| Others                                                                |       | 78                               |       | 75 |   | 119 |   |
| Total capital expenditures under property, plant and  equipment       |       | 1,061                            |       | 1,029 |   | 869 |   |
| Total Capital expenditures                                            |       | 1,071                            |       | 1,033 |   | 972 |   |

 

Wecurrently project total capital expenditures of approximately R$2,068 millionin 2005.  The principal uses of theseexpenditures are expected to be for expansion of our distributioninfrastructure and increases in our generation capacity.

 

## **Business Overview**

 

#### *General*

 

During2004, we generated at our own plants approximately 64.5% of the aggregateamount of energy sold by us to end users or lost due to technical andnon-technical reasons, and we purchased the balance from third parties.  We are required, like other Brazilianelectric utilities, to purchase electricity from Itaipu in an amount determinedby the Federal Government based on our electricity sales.  See “—Generation and Purchase of ElectricPower—Purchase of Electric Power—Itaipu.” In addition, we purchase energy from other concessionaires and theinterconnected 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.

 

Thefollowing table sets forth certain information, in GWh, pertaining to theelectricity that we generated, purchased from other sources and deliveredduring the periods specified:

 

24

----

 

ELECTRIC ENERGY BALANCE (CEMIG MARKET)

 
| ** **                                                          | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| **(GWh)**                                                           | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| RESOURCES (1)                                                       |       | 45,117                           |       | 51,927 |   | 49,372 |   |
| Electricity generated by CEMIG (2)                                  |       | 26,922                           |       | 27,025 |   | 21,608 |   |
| Electricity  generated by auto-producers                            |       | 1,581                            |       | 1,650 |   | 1,234 |   |
| Electricity generated by Ipatinga                                   |       | 237                              |       | 351 |   | 348 |   |
| Electricity generated by Barreiro                                   |       | 72                               |       | — |   | — |   |
| Electricity  generated by Sá Carvalho (3)                      |       | 468                              |       | 305 |   | 425 |   |
| Electricity generated by Horizontes (3) (4)                    |       | 105                              |       | 59 |   | — |   |
| Electricity bought from Itaipu                                      |       | 11,936                           |       | 12,220 |   | 12,735 |   |
| Electricity  bought from the national grid and other companies (5)  |       | —                           |       | 10,317 |   | 13,022 |   |
| Electricity  bought from CCEE and other companies (6)               |       | 3,796                            |       | — |   | — |   |
|                                                                |       |                             |       |   |   |   |   |
| REQUIREMENTS                                                        |       | 45,117                           |       | 51,927 |   | 49,372 |   |
| Electricity  delivered to final consumers (7)                       |       | 36,669                           |       | 35,248 |   | 34,862 |   |
| Electricity  delivered to auto-producers                            |       | 1,472                            |       | 1,323 |   | 1,323 |   |
| Electricity delivered by Ipatinga                                   |       | 237                              |       | 351 |   | 348 |   |
| Electricity delivered by Barreiro                                   |       | 72                               |       | — |   | — |   |
| Electricity  delivered by Sá Carvalho (3)                      |       | 474                              |       | 305 |   | 425 |   |
| Electricity delivered by Horizontes (3)                             |       | 80                               |       | 59 |   | — |   |
| Electricity  delivered to the national grid and other companies (5) |       | —                           |       | 9,720 |   | 7,863 |   |
| Electricity  delivered to the CCEE and other companies (6) (8) |       | 1,798                            |       | — |   | — |   |
|                                                                |       |                             |       |   |   |   |   |
| Losses                                                              |       | 4,315                            |       | 4,921 |   | 4,551 |   |

 

----

(1)                    In2004 there was a change in the method of calculating and recordingtransactions in the wholesale market and with other companies, as stated inNotes 5 and 6. This change is responsible for the variation in the figuresfor sources and demand from 2003 to 2004.

(2)                    Discountingthe losses attributed to generation (637 GWh) and the internal consumption ofthe generating plants (22GWh).

(3)                    Up to 2003,these portions referred to the total amounts of energy available and demand.Beginning in 2004, the short-term transactions on the CCEE and with othercompanies are included in the items “Electricity bought from the CCEE and othercompanies” and “Electricity delivered to the CCEE and other companies”.

(4)                    Includesthe generation by the Pai Joaquim small hydro plant.

(5)                    In previousyears, this portion represented contracts and the physical interchanges betweenCEMIG’s network and the national grid, and also “optimization” supply.

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

(7)                    Includeselectricity delivered to consumers outside the concession area.

(8)                    Includes270 GWh of Initial Contracts and bilateral contracts with other agents of theCCEE.

 

*Generation*

 

Accordingto ANEEL, at December 31, 2004, we were the seventh largest electric powergeneration concessionaire in Brazil as measured by total installedcapacity.  At December 31, 2004, wegenerated electricity at 47 hydroelectric plants, four thermoelectric plantsand one wind farm and had a total installed generation capacity of 5,949 MW, ofwhich hydroelectric plants accounted for 5,764 MW, thermoelectric plantsaccounted for 184 MW and our wind farm accounted for 1 MW.  Seven of our hydroelectric plants accountedfor approximately 84% of our installed electric generation capacity in2004.  We supplied approximately 93% ofthe electricity consumed in Minas Gerais during 2004.  During the year ended December 31, 2004,we generated approximately 64.5% of the aggregate amount of electricity wedelivered to end users or lost due to technical and non-technical reasons.  See “—Energy Losses.”

 

25

----

 

#### *Transmission*

#### * *

We areengaged in the electric power transmission business, which consists oftransporting electric power from the facilities where it is generated to thedistribution networks for delivery to end users.  We transport energy produced at our owngeneration facilities as well as energy that we purchase from Itaipu, theinterconnected power system and other concessionaires.  Our transmission network is comprised ofpower transmission lines with a voltage capacity equal to or greater than 230kV and is part of the national transmission grid regulated by the ONS.  See “The Brazilian Power Industry” in AnnexA.  As of December 31, 2004, ourtransmission network in Minas Gerais consisted of 1,344 miles of 500 kV lines,1,206 miles of 345 kV lines and 467 miles of 230 kV lines, as well as 32substations with a total of 94 transformers and an aggregate transformationcapacity of 15,393 MVA.

 

#### *Distribution*

#### * *

Wehave a distribution 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 than3 MW).  Our concession area coversapproximately 219,103 square miles, or 96.7% of the territory of the state.  As of December 31, 2004, we owned andoperated 238,309 miles of distribution lines, through which we suppliedelectricity to nearly 5.9 million customers. At December 31, 2004, we were the largest electricity distributionconcessionaire in Brazil in terms of GWh sold to end users.  Of the electricity we supplied to finalcustomers as of December 31, 2004, 61.5% was to industrial customers,17.4% was to residential customers, 9.4% was to commercial customers and 11.7%was to rural and other customers.  Thesefigures include the energy sold by Barreiro and Pai Joaquim of 73 GWh and 29GWh, respectively, which were not consolidated in our financial statements.

 

#### *Other Businesses*

#### * *

Whileour main business consists of the generation, transmission and distribution ofelectric power, we also engage in the business of distributing natural gas inMinas Gerais through our majority-owned subsidiary Gasmig.  We also engage in the telecommunicationsbusiness through our consolidated subsidiary Empresa de Infovias S.A., acompany created for the purpose of providing a fiber-optic and coaxial cablenetwork installed along our transmission and distribution lines through whichtelecommunication services can be provided. We are also engaged in the national and international consultingbusiness through our subsidiary Efficientia S.A.

 

## **Revenue Sources**

## ** **

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

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Electricity sales to final customers                 |       | 8,561                            |       | 7,179 |   | 5,458 |   |
| Regulatory extraordinary rate adjustment             |       | 89                               |       | 63 |   | 281 |   |
| Deferred rate adjustment                             |       | 640                              |       | 199 |   | — |   |
| Electricity sales to the interconnected power system |       | 36                               |       | 56 |   | 161 |   |
| Use of basic transmission network                    |       | 245                              |       | 257 |   | 185 |   |
| Natural gas sales                                    |       | 420                              |       | 367 |   | 200 |   |
| Services rendered                                    |       | 29                               |       | 31 |   | 23 |   |
| Telecommunication and other                          |       | 87                               |       | 70 |   | 37 |   |
| Total                                                |       | 10,107                           |       | 8,222 |   | 6,345 |   |

 

26

----

## **Generation**

 

#### *Generation*

 

The following table sets forth certainoperating information concerning our electric power generation plants as of December 31,2004:

 
| **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                            |       | 28.7                                |       | January 2015            |       |
| Emborcação          |       | 1,192                         |       | 497.00                               |       | 1982                            |       | 20.0                                |       | July 2005               | (7)        |
| Nova Ponte                    |       | 510                           |       | 276.00                               |       | 1994                            |       | 8.6                                 |       | July 2005               | (7)        |
| Jaguara                       |       | 424                           |       | 336.00                               |       | 1971                            |       | 7.1                                 |       | August 2013             |       |
| Miranda                       |       | 408                           |       | 202.00                               |       | 1998                            |       | 6.9                                 |       | December 2016           |       |
| Três Marias              |       | 396                           |       | 239.00                               |       | 1962                            |       | 6.7                                 |       | July 2015               |       |
| Volta Grande                  |       | 380                           |       | 229.00                               |       | 1974                            |       | 6.4                                 |       | February 2017           |       |
| Salto Grande                  |       | 102                           |       | 75.00                                |       | 1956                            |       | 1.7                                 |       | July 2015               |       |
| Sá Carvalho              |       | 78                            |       | 58.00                                |       | 2000                            | (2)        | 1.3                                 |       | December 2024           |       |
| Rosal                         |       | 55                            |       | 30.00                                |       | 2004                            | (2)        | 0.9                                 |       | May 2032                |       |
| Itutinga                      |       | 52                            |       | 28.00                                |       | 1955                            |       | 0.9                                 |       | July 2015               |       |
| Camargos                      |       | 46                            |       | 21.00                                |       | 1960                            |       | 0.8                                 |       | July 2015               |       |
| Porto Estrela                 |       | 37                            | (3)        | 18.60                                | (3)        | 2001                            |       | 0.6                                 |       | July 2032               |       |
| Igarapava                     |       | 30.5                          | (4)        | 19.72                                | (4)        | 1999                            |       | 0.5                                 |       | December 2028           |       |
| Funil                         |       | 88                            | (5)        | 43.61                                | (5)        | 2002                            |       | 1.5                                 |       | December 2035           |       |
| Queimado                      |       | 86.6                          | (6)        | 47.85                                | (6)        | 2004                            |       | 1.5                                 |       | January 2033            |       |
| Pai Joaquim                   |       | 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 |       | 114                           |       | 61.88                                |       | —                          |       | 1.9                                 |       | —                       |       |
| Thermoelectric  Plants        |       |                          |       |                                 |       |                            |       |                                |       |                         |       |
| Igarapé                  |       | 131                           |       | 93.00                                |       | 1978                            |       | 2.2                                 |       | August 2024             |       |
| Ipatinga                      |       | 40                            |       | —                               |       | 2000                            | (2)        | 0.7                                 |       | 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                         |       | 5,949.4                       |       | 3,597.22                             |       | —                          |       | 100.0                               | %          | —                       |       |

 

----

(1)              Assured Energy isthe plant’s long-term average output, as established by ANEEL in accordancewith studies conducted by the ONS. Calculation of Assured Energy considers such factors as reservoircapacity and connection to other power plants. Contracts with final customers and other concessionaires do not providefor amounts in excess of a plant’s Assured Energy.

(2)              Indicates ouracquisition date.

(3)              Represents ourinterest in the Porto Estrela plant (33.3%).

(4)              Represents ourinterest in the Igarapava plant (14.5%).

(5)              Represents ourinterest in the Funil plant (49.0%).

(6)              Represents ourinterest in the Queimado plant (82.50%).

(7)              A renewal requestfor 20 more years was made to ANEEL in September 2004. See “—Concessions —Competition”.

 

The following tables set forth certainadditional operating information pertaining to our electricity generationoperations as of the dates indicated:

 

27

----

 
| ** **                      | ** ** | **Circuit Length of Generation  Lines in Miles  (from power plants to generation substations)** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **As of December 31,**                                                                     | ** ** |
| **Voltage of Connection Lines** | ** ** | **2004**                                                                                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| 500 kV                          |       | 4                                                                                               |       | 6 |   | 6 |   |
| 345 to 230  kV                  |       | 7                                                                                               |       | 10 |   | 10 |   |
| 161 to 138  kV                  |       | 42                                                                                              |       | 6 |   | 6 |   |
| 69 to 13.8  kV                  | ** ** | 102                                                                                             | (1)        | 53 |   | 53 |   |
| Total                           |       | 155                                                                                             |       | 75 |   | 75 |   |

 
| ** **                       | ** ** | **Step-Down Transformation  Capacity****(2)****of Generation Substations** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                | ** ** |
| ** **                       | ** ** | **2004**                                                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Number of  step-down substations |       | 52                                                                         |       | 48 |   | 48 |   |
| MVA                              |       | 6,433                                                                      |       | 6,240 |   | 6,240 |   |

 

----

(1)       We increased the circuit length of our 69 kV connection lines in 2004,because we bought the Rosal Facility and the Queimado Facility beganoperations.

(2)       Step-down transformation capacity refers to the ability of atransformer to receive energy at a certain voltage and release it at a reducedvoltage for further distribution.

 

#### *Generation Assets*

#### * *

We have formed in Minas Gerais and otherstates of Brazil, the following wholly-owned subsidiaries to operate certain ofour generation facilities and to hold the related concessions:

 

*Usina Térmica Ipatinga S.A.*  Weoperate the Ipatinga thermoelectric plant through our subsidiary Usina TérmicaIpatinga 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.  The plant supplies power to a large steelmill owned by Usiminas located in eastern Minas Gerais.  We acquired the Ipatinga plant in 2000 forR$90 million from Usiminas as payment for outstanding power supply debts.  We have signed a power purchase agreementwith Usiminas for power produced at Ipatinga. The plant currently has an installed capacity of 40 MW, generated by twounits that began operating in 1984 and that use blast furnace gas as fuel.

 

*Sá Carvalho S.A.*  Weoperate the Sá Carvalho hydroelectric power plant, located on the PiracicabaRiver in the municipality of Antônio Dias in the State of Minas Gerais, throughour subsidiary Sá Carvalho S.A., which we acquired in 2000 for R$87 millionfrom Acesita S.A., or Acesita, a steel company. 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, we renegotiated theinterest rate applicable to 46.67% of the aggregate principal amount of thesedebentures for the following two year period and the remaining 53.33% wasredeemed for R$64 million.

 

*Rosal EnergiaS.A. *In November 2004we bought the *Rosal*hydroelectricplant, which has installed capacity of 55 MW, from Caiuá Serviços deEletricidade S.A., or Caiuá, for a payment of R$134 million.  The Rosal plant, the sole asset of 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 integratedconnection with the *Alegre*and *Mimoso do Sul*electricity systems, whichare owned by the electricity utility of the State of Espírito Santo, Escelsa(Espírito Santo Centrais Elétricas S.A.). The plant’s first and second rotors started operating in December 1999and January 2000, respectively.  Ithas a concession contract for 35 years, maturing in 2032.  ANEEL approved the transfer of control on December 20,2004.

 

*Cemig Capim Branco Energia S.A.* We incorporated Cemig Capim Branco Energia S.A. to develop the CapimBranco Power Facility in partnership with Companhia Vale do Rio Doce—CVRD, orCVRD, a mining company, Comercial e Agrícola Paineiras, an agriculturalcompany, and Companhia Mineira de Metais, a metallurgic company.  The project consists of the CapimBranco I and Capim Branco II hydroelectric power plants, with installedcapacity of 240 MW and 210 MW, respectively. See “Capim Branco Power Facility”, under

 

28

----

 

“Expansion of Generation Capacity” below.  As of December 31, 2004, we had investedR$24.2 million in this project.  We haveentered into a purchase contract with Cemig Capim Branco Energia S.A. underwhich we will purchase the energy produced by Capim Branco I and Capim Branco IIfor 20 years from the date of the start of each plant’s commercialoperations.  This contract was submittedto ANEEL in 2002 ANEEL and was approved in December 2004.  See “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Related to EnvironmentalMatters.”

 

*Horizontes Energia S.A.* We formed Horizontes Energia S.A., or Horizontes Energia, togenerate and trade electricity as an IPP through the commercial operation ofthe following of our smaller hydroelectric plants:  the Machado Mineiro Power Plant (located onthe Pardo River in the municipality of Ninheira in the State of Minas Geraiswith an installed capacity of 1.72 MW); the Salto do Paraopeba Power Plant(located on the Paraopeba River in the town of Jeceaba in the State of Minas Geraiswith an installed capacity of 2.37 MW); the Salto Voltão Power Plant (locatedon the Chapecozinho River in the town of Xanxerê in the State of Santa Catarinawith an installed capacity of 6.76 MW); and the Salto do Passo Velho PowerPlant (located on the Chapecozinho River in the town of Xanxerê in the State ofSanta Catarina with an installed capacity of 1.66 MW), as well as othergenerating projects to be acquired or built with our participation.  The concession relating to the MachadoMineiro Power Plant expires on July 7, 2025 and the concessions relatingto the other plants expire on October 4, 2030.  Horizontes Energia S.A. currently has anagreement with clients to provide electricity from 2004 to 2005.  Weentered into an agreement with Horizontes Energia S.A. under which it isobligated to purchase the energy generated by the power plants held byHorizontes Energia S.A. from January 2007 through December 2016, butthe approval of this contract is pending. We have requested that MME approve the volume of AssuredEnergy of Salto Voltão, which we expect to be 7.36 MW on average.  This approval is also still pending.

 

*Usina Termelétrica Barreiro S.A.* We formed Usina Termelétrica Barreiro S.A. to participate, inpartnership with Vallourec & Mannesmann—V&M do Brasil S.A., orVallourec & Mannesmann, a metallurgic company, in the construction andoperation of the 12.9 MW Barreiro thermoelectric power plant, located onVallourec & Mannesmann’s premises in the Barreiro section of thecity of Belo Horizonte in Minas Gerais. See “Barreiro Thermoelectric Power Plant”, under “Expansion ofGeneration Capacity”, below.  As of December 31,2004 we had invested R$24.4 million in this project.  ANEEL requested that we transfer our interestin Usina Termelétrica Barreiro S.A. to a company which we do not control.  To fulfill this request, a new company calledCentral Termelétrica de Cogeracão S.A. was formed in 2003 in partnership withCompanhia de Saneamento de Minas Gerais—COPASA, or COPASA, the Minas Geraisstate-controlled water and sewage company, as described below.  ANEEL has authorized Central Termelétrica deCogeração S.A to trade energy.  UsinaTermelétrica Barreiro S.A. still holds the assets of Barreiro thermoelectricpower plant.

 

*CEMIG PCH S.A.*** **We formed CEMIG PCHS.A. to generate and trade electric energy as an IPP.  ANEEL requested that we transfer our interestin CEMIG PCH S.A. to a company which we do not control.  To fulfill this request, a new company calledCentral Hidrelétrica Pai Joaquim S.A. was formed in 2003 in partnership withCOPASA, as described below.  ANEEL hasalready authorized Central Hidrelétrica Pai Joaquim S.A to be an IPP.  CEMIG PCH S.A. still holds the assets of PaiJoaquim Small Hydroelectric Power Plant which amount to R$49 million as of December 31,2004.

 

We also have a minority interest in thefollowing companies:

 

*Central Hidrelétrica Pai Joaquim S.A.* We formed Central Hidrelétrica Pai Joaquim S.A. in partnershipwith COPASA to satisfy ANEEL’s request to transfer the concession of PaiJoaquim to a company which we do not control. Central Hidrelétrica Pai Joaquim S.A.’s main activity is the productionand sale of electric energy through a small hydroelectric power plant, as anIPP of 23 MW.  These assets are stillheld by Cemig PCH S.A.  We have a 49%interest in Central Hidrelétrica Pai Joaquim S.A.  We and COPASA are now negotiating an increaseof our interest in this company, which has to be approved by ANEEL.  We intend to sell this energy to some FreeConsumers which are expected to pay higher prices than distribution companies.

 

*Central Termelétrica de Cogeração S.A.* We formed Central Termelétrica de Cogeração S.A. in partnershipwith COPASA to satisfy ANEEL’s request to transfer our interest in UsinaTermelétrica Barreiro S.A. to a company which we do not control.  Central Termelétrica de Cogeração S.A.’s mainactivity is the production and sale of electric energy through a thermoelectricpower plant, as an IPP of 12.9 MW.  Theseassets are still held by

 

29

----

 

Usina Termelétrica BarreiroS.A.  Commercial generationbegan in February 2004.  We have a49% interest in Central Termelétrica de Cogeração S.A.  We and COPASA are now negotiating an increaseof our interest in this company, which has to be approved by ANEEL.

 

#### *Expansion of Generation Capacity*

#### * *

Our capital investment plan submitted toANEEL currently contemplates increasing the installed generation capacity ofour hydroelectric facilities by 617 MW during the next three years through theconstruction of new power plants and the expansion of existing plants.  New generation projects have concessionperiods of 35 years, beginning on the date of the concession agreement.  The construction of the Capim Branco I andCapim Branco II hydroelectric power plants, the Pai Joaquim hydroelectric plantand the Barreiro thermoelectric power plant, discussed under “—GenerationAssets” above, constitute a part of our capital investment plan.  The following is a brief description of our otherprojects, the completion of which are subject to various contingencies, certainof which are beyond our control:

 

*QueimadoHydroelectric Power Plant.*  Our partner in this project is CompanhiaEnergética de Brasília, or CEB, a state-controlled electricity company.  CEB has a 17.5% interest and we have theremaining 82.5%.  The plant, with aninstalled capacity of 105 MW, is located on the Preto River, encompassing areasin the states of Minas Gerais and Goiás and in Brazil’s Federal District.  Construction on this project began on August 10,2000.  The power plant began itscommercial generation on April 9, 2004 with the operation of its firstunit.  The commercial operation of thesecond and third units began on June 16, 2004 and July 8, 2004,respectively.  As of December 31,2004, we had invested R$207.3 million in the project.  The concession relating to this plant expireson December 18, 2032.

 

*Funil HydroelectricPower Plant.* The Funil power plant, with an installed capacity of 180 MW, was built inthe upper course of Grande River, in southern Minas Gerais.  Construction began on September 1, 2000and commercial generation of the first unit began in January 2003.  Commercial generation of the second and thirdunits began in June and July 2003 respectively.  We have a 49% interest in this project andour partner, CVRD, has a 51% stake.  Asof December 31, 2004, we had invested R$155.5 million in thisproject.  The concession relating to thisplant expires on December 20, 2035.

 

*AimorésHydroelectric Power Plant.*  The Aimorés power plant, that is underconstruction on the Doce River, will have an installed capacity of 330 MW.  We have a 49% interest in this enterprise andour partner, CVRD, has a 51% interest. Construction began in May 2001 and commercial generation isscheduled to begin in June 2005.  Asof December 31, 2004, we had invested R$495.8 million in thisproject.  The concession relating to thisplant expires on December 20, 2035. We and CVRD are defending a lawsuit related to licensing for thisplant.  See “Item 8.  Financial Information—Legal Proceedings—LegalProceedings Related to Environmental Matters.”

 

*Irapé HydroelectricPower Plant.* The Irapé power plant, which will have an installed capacity of 360 MW,is located on the Jequitinhonha River, in northern Minas Gerais.  Construction began in April 2002 andcommercial generation is expected to begin in August 2005.  As of December 31, 2004, we had investedR$802.0 million in this project, including R$67.5 million debentures bought by theState of Minas Gerais, using the dividends that were due to the StateGovernment pursuant to an agreement between us and the State Government.  The concession relating to this plant expireson February 28, 2035.

 

*Pai Joaquim SmallHydroelectric Power Plant.*  This project, with an installed capacity of23 MW, consists of the construction of a new hydroelectric power plant and thereassembly of the existing Pai Joaquim powerhouse.  It is located on the Araguari River in thewestern part of Minas Gerais.  Constructionstarted in April 2002 and the commercial generation began on March 31,2004.  As of December 31, 2004 wehad invested R$49.1 million in this project. The concession relating to this plant expires on April 4, 2032.

 

*Capim Branco PowerFacility.*  Thisproject consists of the Capim Branco I and Capim Branco II hydroelectric powerplants, with installed capacity of 240 MW and 210 MW, respectively.  These power plants will be built on theAraguari River in the western part of Minas Gerais.  Construction of Capim Branco I began in****September 2003 and Capim Branco II in March 2004.  Commercial generation at Capim Branco I isexpected to begin in January 2006. Commercial generation at Capim Branco II is expected to begin in December 2006.  As of

 

30

----

 

December 31, 2004 we had invested R$24.2 million in thisproject.  The concessions relating tothese plants expire on August 29, 2036.

 

*BarreiroThermoelectric Power Plant.*  This project consists of the construction andoperation of the 12.9 MW Barreiro thermoelectric power plant, which utilizesblast furnace gas and charcoal tar as fuel. The construction of the plant, located on Vallourec &Mannesmann’s premises in the Barreiro section of the city of Belo Horizontein Minas Gerais, began in April 2002. We were the manager of the engineering, procurement and constructioncontract for this project, and we are also responsible for the operation andmaintenance of the plant.  Vallourec &Mannesmann provides the facilities, supplies the fuel and signed a powerpurchase agreement to assure a guaranteed return on investment to us.  Commercial generation began on February 21,2004.  As of December 31, 2004 wehad invested R$9.3 million in this project.

 

#### *Co-generation Joint Ventures with Customers*

#### * *

We intend to enter into joint ventures withindustrial customers to develop co-generation facilities.  These facilities would be built on customers’premises and would generate electricity using fuel supplied by the customers’industrial processes.  Each co-generationproject would be funded in part through an agreement with the particularcustomer to purchase the electricity generated in that customer’sfacility.  We would assume theresponsibility for operating and maintaining the co-generation facility.

 

#### *Wind Farm*

#### * *

Morro do Camelinho, our wind farm, beganoperating in 1994.  It is located inGouveia, a municipality in northern Minas Gerais.  This project is the first wind farm in Brazilto be connected to the national electricity transmission grid and it isconnected to CEMIG’s distribution system. It has a total generation capacity of 1 MW, powered by four turbineswith a capacity of 250 kW each.  Morro doCamelinho was built through a technical and scientific cooperation arrangementwith the government of Germany.  The costof the project was US$1.5 million, with 51% of the cost provided by us and theremaining 49% provided by the government of Germany.

 

## **Transmission**

## ** **

#### *Overview*

#### * *

Our transmission business consists of thebulk transfer of electricity from the power plants where it is generated to thedistribution system, which carries the electricity to final customers.  Our transmission system is comprised oftransmission lines and step-down substations with voltages ranging from 230 kVto 500 kV.

 

In 1998, ANEEL created the ONS, a non-profitprivate entity 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 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 of Law No. 10,848,the ONS was a self-regulated entity and its management was not subject tointerference from the Federal Government. Law No. 10,848 granted the Brazilian government the power tonominate the main directors of the ONS. One of the main objectives of the ONS is to guarantee that all partiesin the industry have access to the transmission network in a non-discriminatorymanner.  Under ANEEL regulations, ownersof different parts of the basic transmission network, Brazil’s nationwideelectric power transmission network, must transfer operating control of theirtransmission facilities to the ONS.  Wecomplied with this requirement by entering into a transmission serviceagreement on December 10, 1999. Pursuant to this agreement, the ONS could represent us in contracts withgeneration companies, distribution companies and Free Consumers for use of thebasic transmission network.  Pursuant tothe contracts between the ONS, acting on our behalf, and users of the basictransmission network, the users pay us a portion of the revenues we arepermitted to receive (as determined by ANEEL) pursuant to our concessioncontract.  During the year ended December 31,2004, we recorded income totaling R$245 million as a result of thisarrangement.  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

 

31

----

 

December 31, 2004, we recorded expenses totaling R$586 millionrelating to payments made to the ONS and owners of different portions of thebasic transmission network.  See “Item5.  Operating and Financial Review andProspects” and “The Brazilian Power Industry” in Annex A.

 

We transmit both the energy that we generateand the energy that we purchase from Itaipu, the interconnected power systemand other sources.  At December 31,2004, we also had 9 industrial customers whom we supplied directly with highvoltage (equal to or greater than 230 kV per industrial customer) energythrough their connections to our transmission lines.  These industrial customers accounted forapproximately 11.5% of the total volume of electricity we sold in the yearended December 31, 2004.  We alsotransmit energy to distribution systems through the South/Southeast division ofthe interconnected power system.

 

The following tables set forth certainoperating information pertaining to our transmission capacity for the datesindicated:

 
| ** **                        | ** ** | **Circuit Length of Transmission  Lines in Miles  (from generation substations to distribution substations)** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **As of December 31,**                                                                                   | ** ** |
| **Voltage of Transmission Lines** | ** ** | **2004**                                                                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| 500 kV                            |       | 1,344                                                                                                         |       | 1,344 |   | 1,351 |   |
| 345 kV                            |       | 1,206                                                                                                         |       | 1,193 |   | 1,195 |   |
| 230 kV                            |       | 467                                                                                                           |       | 463 |   | 466 | (1) |
| Total                             |       | 3,017                                                                                                         |       | 3,000 |   | 3,012 |   |

 

----

(1)              We reduced thecircuit length of our 230 kV transmission lines in 2002 because EscelsaEspírito Santo Centrais Elétricas S.A. connected its own 230 kV transmissionline from its Mascarenhas Power Plant to our Valadares distribution substation.

 
| ** **                       | ** ** | **Step-Down Transformation  Capacity****(1)****of Transmission Substations** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                  | ** ** |
| ** **                       | ** ** | **2004**                                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Number of  step-down substations |       | 32                                                                           |       | 31 |   | 30 |   |
| MVA                              |       | 15,393                                                                       |       | 15,169 | (2) | 14,563 |   |

 

----

(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.

(2)              Increment due toItajubá 3 and Vespasiano 2.

 

#### *Expansion of Transmission Capacity*

#### * *

In accordance with the new regulatoryframework in the Brazilian electricity sector, concessions for the expansion ofthe electricity transmission infrastructure in Brazil are awarded according toa public bidding system or are authorized by ANEEL.

 

*Bom Despacho 3.*  ANEEL awarded us the concession to build andoperate the Bom Despacho 3 Substation in February 2002.  This substation, located in the town of BomDespacho, 93.2 miles from Belo Horizonte, started its operation on May 3,2004.  The goal of this project is toincrease the reliability of the basic transmission network in the SoutheastRegion of Brazil.  This substationimproves the operation of our system and supplies 100 MVA of reactive energy tothe system, which improves the quality of the electricity in our system and inthe basic transmission network.  As of December 31,2004, we had invested R$83.4 million in this project.

 

*Montes Claros - Irapé.*  In September 2003,a consortium formed by us, Companhia Técnica de Engenharia Elétrica – ALUSA, orALUSA, Furnas Centrais Elétricas S.A., or Furnas, and Orteng Equipamentos eSistemas Ltda., or Orteng, won the concession auctioned by ANEEL to the MontesClaros – Irapé transmission line.  Asrequired in the bidding process, the partners formed the Companhia Translestede Transmissão, which will be responsible for building and operating thetransmission line.  This 345 kVtransmission line will connect a substation

 

32

----

 

located in Montes Claros, a city in northern Minas Gerais, and thesubstation of the Irapé Hydroelectric Power Plant, with a length ofapproximately 93.2 miles.  The projectbegan in May 2004 and construction began in January 2005 and isexpected to be completed in October 2005. The concession expires on February 18, 2034.  As of December 31, 2004, we had investedR$8.3 million in this project.

 

*Furnas - Pimenta.*  In September 2004, a consortium formedby us and Furnas, with interests of 49%, and 51%, respectively, won theconcession auctioned by ANEEL to the Furnas – Pimenta transmission line.  As required in the bidding process, thepartners formed the Companhia de Transmissão Centroeste de Minas, which will beresponsible for building and operating this transmission line.  This 345 kV transmission line, with a lengthof approximately 46.6 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.  Webegan the project in March 2005 and expect it to be complete inapproximately 18 months.  As of December 31,2004, we had invested R$0.3 million in this project.

 

*Itutinga – Juiz de Fora.*  InSeptember 2004, a consortium formed by us, Alusa, Furnas, and Orteng, withinterests of 24%, 41%, 25% and 10%, respectively, won the concession auctionedby ANEEL to the Itutinga – Juiz de Fora transmission line.  As required in the bidding process, thepartners formed the Companhia Transudeste de Transmissão, which will beresponsible for building and operating this transmission line.  This 345 kV transmission line, with a lengthof approximately 87.0 miles, will connect the substation of the ItutingaHydroelectric Power Plant and a substation located in Juiz de Fora, a city inthe southeastern Minas Gerais.  We beganthe project  in March 2005 andexpect it to be complete in approximately 20 months.  As of December 31, 2004, we had investedR$0.7 million in this project.

 

*Irapé - Araçuaí.*  In November 2004, a consortium formed byus, Alusa, Furnas, and Orteng, with interests of 24.5%, 41%, 24.5% and 10%,respectively, won the concession auctioned by ANEEL to the Irapé - Araçuaítransmission line.  As required in thebidding process, the partners formed the Companhia Transirapé de Transmissão,which will be responsible for building and operating this transmissionline.  This 230 kV transmission line,with a length of approximately 40.4 miles, will connect the substation of theIrapé Hydroelectric Power Plant and a substation to be built in Araçuaí, a citylocated in the northeastern Minas Gerais. We began the project in March 2005 and expect it to be complete inapproximately 18 months.  As of December 31,2004, we had not started to invest in this project.

 

We believe that our transmission system willneed to be reinforced and expanded through the construction of new substationsand transmission lines within the next five years.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources.”

 

## **Distribution andPurchase of Electric Power**

## ** **

#### *Overview*

#### * *

Our distribution operations consist of thetransfer of electricity from distribution substations to final customers.  Our distribution network is comprised of awidespread network of overhead and underground lines and substations withvoltages of less than 230 kV.  We supplyelectricity to smaller industrial customers at the higher end of the voltagerange and residential and commercial customers at the lower end of the range.

 

From January 1, 2000 through December 31,2004, we invested approximately R$1,755 million in the construction andacquisition of property, plant and equipment used to expand our distributionsystem.

 

The following tables provide certainoperating information pertaining to our distribution system, as of the datespresented:

 

33

----

 
| ** **                        | ** ** | **Circuit Length of Distribution  Lines in Miles  (from distribution substations to final customers)** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **As of December 31,**                                                                            | ** ** |
| **Voltage of Distribution Lines** | ** ** | **2004**                                                                                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| 161 kV                            |       | 34.2                                                                                                   |       | 34.2 |   | 34.2 |   |
| 138 kV                            |       | 6,526.9                                                                                                |       | 6,524.4 |   | 6,521.3 |   |
| 69 kV                             |       | 2,823.5                                                                                                | (1)        | 2,887.5 |   | 2,886.3 |   |
| 34.5 kV +  Others                 |       | 610.8                                                                                                  |       | 610.8 |   | 594.7 | (2) |
| Total                             |       | 9,995.4                                                                                                | (1)        | 10,056.9 |   | 10,036.5 |   |

 
| ** **                            | ** ** | **Circuit Length of Distribution  Lines in Miles  (from distribution substations to final customers)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **As of December 31,**                                                                            | ** ** |
| **Type of Distribution Lines**        | ** ** | **2004**                                                                                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Overhead  urban distribution lines    |       | 51,461.2                                                                                               |       | 51,051.7 |   | 34,426.3 |   |
| Underground  urban distribution lines |       | 439.9                                                                                                  |       | 439.3 |   | 195.1 |   |
| Overhead  rural distribution lines    |       | 176,412.8                                                                                              |       | 171,769.3 |   | 170,777.6 |   |
| Total                                 |       | 228,313.9                                                                                              |       | 223,260.3 | (3) | 205,399.0 |   |

 
| ** **             | ** ** | **Step-Down Transformation  Capacity****(4)****of Distribution Substations** | ** ** |
|------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **As of December 31,**                                                  | ** ** |
| ** **             | ** ** | **2004**                                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Number of  substations |       | 350                                                                          |       | 348 |   | 346 |   |
| MVA                    |       | 8,050                                                                        |       | 7,987 |   | 7,953 |   |

 

----

(1)              The decrease in thecircuit length of these lines from 2003 was due to the decommissioning ofcertain lines.

(2)              The decrease in thecircuit length of these lines from 2001 was due to the decommissioning****of certain lines in eastern Minas Geraisas a result of the conversion of 34.5 kV lines to 69 kV lines.

(3)              In April 2003PROOBRA was replaced by SIGEM in the management of the distribution company’slogistics management program.

(4)              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 for the Control and ManagementInvestment Program, or PROOBRA, were calculated by projection from the existingnetwork.  In 2003, we began to calculatethis as the 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’sdistribution network.  With the inclusionand startup of the Operation, Projects, Client Registry and Planning modules,all the distributor’s assets are now being managed by the GEMINI system and arenow the source of information for ANEEL in assembling the data on assets forthe rate reviews.

 

As a result, the statistics on extent ofnetworks, number of transformers, public illumination and quantity oftransmission posts are now supplied by the GEMINI system on a geo-referencedbasis.  We believe this has resulted inmore precise data, reduction of errors in valuing fixed assets, and increasedreliability.

 

#### *Expansion of Distribution Capacity*

#### * *

Our distribution expansion plan for the nextfive years is based on projections of market growth.  We anticipate that this growth will be fueledby new customer connections, increased electricity usage among our

 

34

----

 

existing customers and additional electricity distribution needs fromnew IPP projects.  According toapplicable law, IPPs have the right to use our distribution network uponpayment of certain fees.  During the nextfive years, we anticipate connecting approximately 882,000 new urban customersand 182,000 rural customers.  In order toaccommodate this growth, we expect that we will need to add 885,000medium-voltage poles, 202.6 miles of transmission lines and 12 step-downsubstations to our distribution network, increasing the network’s installedcapacity to 510 MVA.  Over the next fiveyears, we expect to invest approximately R$3.45 billion to expand ourdistribution system.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources.”

 

We haveadopted a rural electricity development program, with the participation of theFederal Government and the State Government, called *Luz Para Todos*.  Ourplan is to use the *Luz Para Todos*program to meet our target for supply of electricity to 100% of rural consumersin Minas Gerais by 2006 – this is a total of approximately 176,000clients.  To meet this objective, we willneed funding in the amount of approximately R$1,641 million.  The *LuzPara Todos* program includes the *LuzSolar* sub-program, which uses solar energy to light schools,community centers and rural homes in remote locations not yet reached by thedistribution network.  We expect thatthis sub-program will connect 7,000 new consumers by 2006.  Additionally, the *Luz no Saber* sub-program connected 479 state and municipalschools in 2004, and aims to connect 646 state and municipal schools in 2005,thereby completing the connection of electricity services to all the schools inthe State of Minas Gerais.

 

#### *Purchase of Electric Power*

#### * *

During the year ended December 31, 2004,we purchased 11,936 GWh of electricity from Itaipu, which representedapproximately 32.6% of the electricity we sold to end users.  In addition, during the same period, wepurchased 3,796 GWh of electricity from the interconnected power system andother concessionaires, which represented approximately 10.4% of the electricitywe sold to end users.

 

*Itaipu.*  Itaipu is one of the largest operatinghydroelectric plants in the world, with an installed capacity of 12,600MW.  *CentraisElétricas Brasileiras S.A.*, or Eletrobrás, a holding companycontrolled by the Federal Government, owns a 50% interest in Itaipu, while theremaining 50% is owned by the government of Paraguay.  Brazil, pursuant to its 1973 treaty withParaguay, has the option to purchase all of the electricity generated by Itaiputhat is not consumed by Paraguay.  Inpractice, Brazil generally purchases more than 95% of the electricity generatedby Itaipu.

 

We are one of the 19 electric power distributioncompanies operating in the South, Southeast and Center West Regions of Brazilthat are jointly required to purchase all of Brazil’s portion of theelectricity generated by Itaipu.  TheFederal Government allocates Brazil’s portion of Itaipu’s power among theseelectric companies in amounts proportionate to their respective historicalmarket share of total electricity sales. We are currently required to purchase approximately 17% of the totalamount of electricity purchased by Brazil from Itaipu at rates fixed to defrayItaipu’s operating expenses and payments of principal and interest on Itaipu’sdollar-denominated borrowings and the cost in *reais*of transmitting such power to the interconnected power system.  These rates have been above the nationalaverage for bulk supply of power and are calculated in U.S. dollars.  Therefore, fluctuations in the U.S. dollar/*real* exchange rate affect the cost, inreal terms, of electricity we are required to purchase from Itaipu.  Historically, we have been able to recoverthe cost of such electricity by charging supply rates to consumers.  According to our concession agreement,increases in the supply rate may be transferred to the final customer uponapproval by ANEEL.

 

*Interconnected PowerSystem.*  We alsopurchase electricity from the interconnected power system, a nationalinterconnected power grid designed to optimize electricity generation inBrazil.  Electric power generationcompanies in Brazil, including us, are required to transfer excess energy intothe interconnected power system, where it then becomes available for purchaseby other power companies.

 

35

----

 

**Energy Losses**

 

The rules under the New Industry Modelfor the electricity sector have led to a change in our method of calculatinglosses resulting from the energy that passes through our system.  Under the New Industry Model for theelectricity sector, as an incentive for competition, there is now free accessto the transmission and distribution networks, enabling certain customers tobuy their electricity freely from other suppliers.  Customers who opt for this free-negotiationmode of supply now have two contracts: one with the owner of the distributionor transmission network for the use of the networks, and the other with theselling agent or generator for the electricity. Also, under the new regulations, (i) our transmission assets withvoltage of greater than or equal to 230 kV became part of the national basicgrid which is operated by the ONS, referred to as the Basic Grid; and (ii) energylosses occurring in this Basic Grid are divided equally so that 50% isallocated among generation agents in proportion to each of their levels ofenergy generation and the other 50% is allocated among consumption agents(distributors and Free Consumers) in proportion to each of their energyloads.  As a result, the losses in theBasic Grid attributed to a given agent now have no direct relationship with itsBasic Grid assets, nor can the agents have control over them.  Therefore, these losses take on the status ofan electricity transmission service charge for the agents of the sector, andbecome part of the cost structure covered by the distributors’ retail rate,substantially reducing the risk of financial losses.

 

In 2004, our level of total energy losses was4,315 GWh.  Part of this loss (915GWh) is related to operations in the Basic Grid, and the remainder (3,400 GWh)reflects losses in our distribution systems and represents 8.6% of the totalenergy that passed trough our distribution systems (39,375 GWh).

 

We divide our energy losses into two basiccategories: technical losses and non-technical losses.  Technical losses account for approximately92% of our energy losses.  These lossesare the inevitable result of the step-down transformation process and thetransportation of electric energy through the 3,017 miles of transmission linesand 238,309 miles of distribution lines that we operate.

 

We attempt to minimize technical losses byperforming rigorous and regular evaluations of the quality of our electricitysupply.  We routinely upgrade and expandour transmission and distribution systems in order to maintain quality andreliability standards, and consequently, reduce technical losses.  In addition, we operate our transmission anddistribution systems at certain specified voltage levels in order to minimizelosses.

 

Non-technical losses account for theremaining 8% of our energy losses and result from fraud, illegal connections(which increased during the Electricity Rationing Plan), metering errors andmeter defects.  These losses accountedfor 0.8% of the electricity that we sold during 2004.  In order to minimize non-technical losses, weregularly take preventative actions, including:

 

•                                          inspection ofcustomers’ meters and connections;

 

•                                          modernizationof metering systems;

 

•                                          training ofmeter-reading personnel;

 

•                                          standardizationof meter installation procedures;

 

•                                          installationof meters with quality control warranties;

 

•                                          customerdatabase updating; and

 

•                                          developmentof a theft-protected distribution network.

 

Additionally, we have developed an integratedsystem designed to help detect and measure controllable losses in all parts ofour distribution system.

 

36

----

 

## **Customers and Billing**

## ** **

#### *Customer Base*

#### * *

Our distribution business’ customers, all ofwhom are located within our concession area in Minas Gerais, are divided intofive principal categories: industrial (including mining, manufacturing andprocessing activities); residential; commercial (including service-orientedbusinesses, universities and hospitals); rural; and other (includinggovernmental and public entities). During the year ended December 31, 2004, we sold 37,533 GWh ofenergy.  This does not include sales tothe interconnected power system and other concessionaires, but does includeenergy sold by Barreiro and Pai Joaquim of 73 GWh and 29 GWh, respectively,which were not consolidated in our financial statements.

 

For 2004, as compared to 2003, the volume ofelectric power sold by us to industrial, commercial and rural customersincreased by 6.2%, 4.0%, 3.5%, respectively. Theother consumer category grew 0.8% (this excludes wholesale supply).  The residential consumption remained roughlyunchanged from 2003 to 2004.  In2004, Sá Carvalho, Ipatinga, Barreiro, Pai Joaquim and Horizontes Energia S.A.were included considered in the industrial category.  The following table provides informationregarding the number of our customers as of December 31, 2004 andconsumption by customer category for the years ended December 31, 2004,2003 and 2002:

 
| **Customer Category**              | ** ** | **Number of  customers at  December 31,** | ** ** | **Consumption (GWh)** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|
| **Years ended  December 31,** |
| ** **                         | ** ** | **2004**                                       | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Industrial                         |       | 68,265                                         |       | 23,071                | (3)        | 21,715 | (2) | 21,906 | (1) |
| Residential                        |       | 4,830,935                                      |       | 6,526                 |       | 6,529 |   | 6,360 |   |
| Commercial                         |       | 530,158                                        |       | 3,537                 |       | 3,402 |   | 3,283 |   |
| Rural                              |       | 388,445                                        |       | 1,846                 |       | 1,783 |   | 1,705 |   |
| Own  consumption                   |       | 1,324                                          | (5)        | 55                    |       | 55 |   | 50 |   |
| Other (4)                          |       | 55,780                                         |       | 2,498                 |       | 2,478 |   | 2,330 |   |
| Total                              |       | 5,874,907                                      |       | 37,533                |       | 35,962 |   | 35,634 |   |

 

----

(1)              Includes consumption by *Sá Carvalho S.A*. and *Usina Térmica Ipatinga S.A*., which consumeall of the energy that they produce.

(2)              ANEEL includes consumption by *Sá Carvalho S.A*., *Usina Térmica Ipatinga S.A*. and *Horizontes Energia S.A*.

(3)              In 2004, in addition to the projects noted infootnote 2, the consumption by *CentralHidrelétrica**Pai Joaquim*and *Usina Termelétrica Barreiro S.A.* were alsoincluded.

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

(5)              Refers to the number of our plants, facilitiesand offices that use our energy, each of which is considered a customerpursuant to ANEEL regulations.

 

In 2004, we added and billed 130,708 newfinal customers, representing growth of 2.3% compared to 2003, through theexpansion of our transmission and distribution systems.

 

The largest portion of the energy we sell ispurchased by large industrial customers. At December 31, 2004, nine of our industrial customers had highvoltage electrical energy supplied through direct connections to ourtransmission lines.  These customersconstituted 11.5% of our total volume of electrical power sales during 2004,and approximately 6.6% of our revenues. In the same period, our ten largest industrial customers accounted fornearly 17.9% of energy consumed.  None ofour ten largest customers is owned by the State Government or by the FederalGovernment.

 

As of December 31, 2004, we had enteredinto standard power purchase agreements with 3,840 of our industrial customers,of which 580 customers had demand above 500 kW. Our standard power purchase agreement with industrial customers has aduration of three, five or ten years and contains a minimum demand clause thatrequires the customer to pay for the contracted demand, which represents thesystem capacity reserved for that

 

37

----

 

customer, as well as the customer’s actual consumption.  We believe that this billing method providesus with a relatively stable source of revenue.

 

The following table shows our industrialenergy sales volumes by type of industrial customer as of December 31,2004 :

 
| **Industrial Customers**    | ** ** | **Energy Sales Volume  in GWh** | ** ** | **Consumption as a  Percentage of Total  Industrial Energy Sales  Volume** | ** ** |
|-----------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------|------------|
| Steel  industry             |       | 5,238                           | (1)        | 22.70                                                                      |       |
| Ferroalloy  industry        |       | 4,575                           |       | 19.83                                                                      |       |
| Non-ferrous  metal industry |       | 1,749                           |       | 7.58                                                                       |       |
| Mining  industry            |       | 2,355                           |       | 10.21                                                                      |       |
| Cement  industry            |       | 780                             |       | 3.38                                                                       |       |
| Automotive  industry        |       | 618                             |       | 2.68                                                                       |       |
| Others                      |       | 7,756                           | (2)        | 33.62                                                                      |       |
| Total                       |       | 23,071                          |       | 100.00                                                                     |       |

 

----

(1)              Includes consumptionby Sá Carvalho, Barreiro and Ipatinga.

(2)              Includes Pai Joaquim and Horizontes EnergiaS.A.

 

The following table sets forth the names andrelated industries of our ten largest customers in 2004:

 
| **Ten Largest Customers  (listed in order of total GWh of electricity purchased from us in 2004)** | ** ** | **Industry** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------|------------|
| Usinas Siderúrgicas de Minas Gerais S.A.–  USIMINAS                                      |       | Steel        |       |
| White Martins Gases Industriais S.A.                                                               |       | Chemical     |       |
| Rima Eletrometalurgia S.A                                                                          |       | Ferroalloys  |       |
| Companhia Siderúrgica Belgo Mineira                                                           |       | Steel        |       |
| Companhia Mineira de Metais.                                                                       |       | Non-ferrous  |       |
| Ligas de Alumínio S.A.                                                                        |       | Ferroalloys  |       |
| Companhia Brasileira de Carbureto de Cálcio  - CBCC.                                          |       | Ferroalloys  |       |
| Companhia Ferro Ligas Minas Gerais                                                                 |       | Ferroalloys  |       |
| Ligas de Alumínio S.A. Italmagnésio  Nordeste S.A.                                       |       | Ferroalloys  |       |
| Saint Gobain Materiais Cerâmicos Ltda.                                                        |       | Chemical     |       |

 

We have enteredinto contracts with other large Free Consumers both within and outside of MinasGerais involving electricity volume of 8,760 GWh as a result of a strategy tocapture a larger market share.  As aresult of the unbundling, these contracts were assigned to Cemig Generation andTransmission in 2005.

 

Some of ourcustomers may elect to become Free Consumers and purchase electricity directly fromother generators or traders of electricity instead of purchasing from us.  Most of our large clients have already boughtelectricity from Cemig Generation and Transmission for the next several years,representing almost 47.3% of our annual sales revenue.  Consumers that opt to become Free Consumersare primarily industrial customers whose demand generally exceeds 3 MW.Consumers that consume between 500 kW and 3 MW may opt to purchase energy fromother sources, if such source is a renewable energy source, such as smallhydroelectric facilities or biomass.  Atotal of 762 of our clients which currently purchase electricity at regulatedrates (“captive consumers”) representing annual sales revenue of R$683 million(or 7.2% of our annual sales revenue), may elect to become Free Consumers oropt to purchase energy from alternative sources.

 

#### *Billing*

#### * *

Our monthly billing and payment proceduresfor electricity supply vary by customer category.  Our large customers with direct connectionsto our transmission network are billed on the same day their meters are read.

 

38

----

 

Payment is required within five days after delivery of the bill.  Other customers receiving high and mediumvoltage electricity (approximately 8,000 consumers supplied at a voltage levelequal to or greater than 2.3 kV or connected by underground distribution lines,with the exception of public sector entities) are billed within one (70%) ortwo (30%) days of their meter reading and payment is required within five daysafter delivery of the bill.  Ourremaining customers are billed within seven days of their meter reading andpayment is required within 10 days after delivery of the bill or 15 days afterdelivery of the bill in the case of public sector entities.  Bills are prepared from meter readings or onthe basis of estimated consumption.

 

#### *Seasonality*

#### * *

Our sales are affected by marketseasonality.  Usually, an increase inconsumption by industrial and commercial customers occurs in the third quarterdue to increases in industrial and commercial activity.  In addition, there is generally an increasein usage across all customer categories during the summer due to the increasein temperatures.  Certain figuresrepresenting quarterly consumption by final customers from 2002 through 2004,in GWh, are set forth below:

 
| **Year**         | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
|             |       |              |       |               |       |              |       |               |       |
| 2002(1) (4) |       | 8,306             |       | 9,087              |       | 9,127             |       | 9,114              |       |
| 2003(2) (4) |       | 8,831             |       | 8,932              |       | 8,964             |       | 9,235              |       |
| 2004(3) (4) |       | 9,067             |       | 9,353              |       | 9,496             |       | 9,617              |       |

 

----

(1)          Includes consumption by *Sá Carvalho S.A* and *Usina Térmica Ipatinga S.A.*

(2)          Includes consumption by *Sá Carvalho S.A., Usina Térmica Ipatinga S.A*.and *Horizontes Energia S.A*.

(3)          Includes consumption by *Sá Carvalho S.A., Usina Térmica Ipatinga S.A., UsinaTérmica Barreiro S.A., Usina Hidrelétrica Pai Joaquim S.A.* and *Horizontes Energia S.A*.

(4)          Does not include supplyto other concessionaires.

 

Consumption by residential customers remainssluggish and has not returned to pre-rationing levels.  However, the total sales in the fourthquarter of 2003 returned to levels similar to those prerationing.  In 2004, consumption by residential customersremained at almost the same level as 2003.

 

## **Competition**

## ** **

*Impacts of the New Model for the Electricity Sector*

 

Theimplementation of the new model for the electricity sector has allowedconsumers with a demand of three MW or more to become Free Consumers.  This might adversely affect the results ofoperations of our distribution company, considering that 48.9% of the volume ofits annual sales was to potentially Free Consumers, which were the target ofour competitors.  Considering the currentsituation of excess capacity in Brazil and the obligation of distributors tobuy through regulated auctions, our generation and transmission subsidiaryundertook a strategy of maintaining and even seeking to enlarge its marketshare, and also of minimizing its need for sales in the regulated auctions forexisting capacity.

 

The managementof our portfolio through a major commercial effort in relation to our clientbase, resulted in our successfully obtaining signatures to 129 contracts withFree Consumers by December 31, 2004. Eleven of these contracts are with companies located outside of our distributioncompany’s concession area.  Thesecontracts have an average duration of three to ten years, and represent avolume of 18,000 GWh/year.

 

Of the previous base of our captive consumers, only four did not signcontracts with us and instead opted to become Free Consumers.  These four formerly captive consumersrepresented an annual volume of 367 GWh. Another seven consumers, representing approximately 963 GWh, elected to opt out ofthe Regulated Contracting

 

39

----

 

Environment (ACR) and choose their owngeneration subsidiary as a supplier.

 

In addition to our sales effort in the Free Contracting Environment(ACL), we were successful in obtaining contracts in the Regulated ContractingEnvironment (ACR) that represent a volume of 8,120 GWh/year.  The term of these contracts begins in 2006and they have a duration of eight years. In addition, in April 2005 we obtained new contracts in the ACRthat represented a volume of 920 GWh/year with terms beginning on January 1,2008 and which have a duration of eight years. We still have an opportunity to obtain contracts on the remaining 25% ofthe Initial Contracts, in the approximate amount of 7,600 GWh, which we expectwill terminate in 2005.

 

Through implementation of this strategy, we were successful in sellingmost of the existing generation capacity, largely through contracts for whichrenewals will begin only after five years. By that point, a balance is expected between the supply and demand ofelectricity in Brazil, which should result in better price conditions.

 

#### *Concessions*

#### * *

Each concession that we currently hold issubject to a competitive bidding process upon its expiration.  However, in accordance with the ConcessionsLaw, existing concessions may be renewed without a bidding process by theFederal Government for additional periods of up to 20 years upon application bythe concessionaire, provided the concessionaire has met minimum performancestandards and the proposal is otherwise acceptable to the FederalGovernment.  On September 22, 2004, we applied to ANEEL for a 20-yearrenewal of the concessions of the Emborcação and Nova Ponte HydroelectricPlants.

 

In addition, it is possible that a number ofour large industrial clients may become SPPs pursuant to the Concessions Law inorder to obtain the right to generate electricity for their own use.  The granting of certain concessions to ourlarge industrial clients could adversely affect our results of operations.

 

## **Raw Materials**

 

Our principal raw materials expense is thepurchase of fuel oil, which is consumed by our three thermoelectric plants inthe electricity generation process.  Fueloil consumption for the year ended December 31, 2004 represented anexpense of R$19.1 million of which R$18.3 million was reimbursed to us by theConta de Consumo de Combustível (Fuel Usage Quota Account), or CCCAccount.  The CCC Account was created bythe Federal Government to offset the higher marginal operating costs ofthermoelectric plants, and we and other electricity concessionaires must makecontributions to this account.  See “Item5.  Operating and Financial Review andProspects” and “The Brazilian Power Industry—Regulatory Charges” in AnnexA.  We believe that supplies of fuel oilare readily available.  Although theprice of fuel oil may fluctuate, we have generally been able to offset all or aportion of our increased fuel oil costs through adjustments to our rates.

 

## **Other Businesses**

## ** **

#### *Natural Gas Distribution*

#### * *

Our subsidiary Gasmig was established inMinas Gerais, Brazil in 1986 for the purpose of developing and implementing thedistribution of natural gas in Minas Gerais. We own approximately 55% of Gasmig. The remaining shares are owned by TSS Participações S.A., Gaspetro –Petrobras Gas S.A., Minas Gerais Participações Ltda., or MGI, the investingbody of the State Government, and by the city of Belo Horizonte.

 

In January 1993, the State Governmentgranted to Gasmig an exclusive 30-year distribution concession coveringall of Minas Gerais and all types of consumers. Gasmig’s marketing efforts focus on its ability to provide a moreeconomically efficient and environmentally friendly alternative to oil,liquefied petroleum gas (LPG) and wood. In 2004, Gasmig supplied approximately 1.1 million cubic meters of gasper day to 140 customers.  At December 31,2004, Gasmig also supplied natural gas to 63 automotive natural gas stationsand to two power plants.  During 2004,Gasmig distributed approximately 5% of all natural gas distributed in Brazil.

 

40

----

 

Minas Gerais accounts for approximately 17%of the total energy consumption in Brazil. Many energy-intensive industries such as the cement, steel, ferroalloysand metallurgy industries have significant operations in the state.  We estimate that total demand for natural gasin Minas Gerais will amount to nearly 13 million cubic meters of gas per day by2009, which exceeds the projected available supply.  In addition, the recent completion of anatural gas pipeline between Brazil and Bolivia provides a significant sourceof natural gas, enabling Gasmig to better meet demand.  Gasmig’s key strategy is to expand itsdistribution network in order to serve the unsatisfied portion of thedemand.  Gasmig is engaged in the developmentof new projects to extend its distribution systems to reach customers in otherareas of Minas Gerais, principally in heavily industrialized areas.

 

For 2004, Gasmig had gross revenues of R$435million and net income after taxes of R$39 million.

 

In 2004, Gasmig invested approximately R$30million in the expansion of its gas pipeline network to serve more clients inthe State of Minas Gerais.  The funds tofinance the expansion came primarily from its own cash flow and dividendreinvestment.  Currently, the natural gaspipeline which brings natural gas from the Campos oil basin (State of Rio deJaneiro, Brazil) operates at full capacity and further investment by theFederal Government will be necessary to expand the capacity or in theconstruction of a new pipeline to supply the growing natural gas demand in theState of Minas Gerais.

 

On August 25, 2004, CEMIG, Gasmig,Gaspetro and Petrobras entered into an Association Agreement, pursuant to whichCEMIG agreed to sell a 40% equity interest in Gasmig to Gaspetro, a subsidiaryof 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.

 

The transaction was implemented on December 15,2004 when Petrobras, through its subsidiaries Gaspetro and TSS, concluded theacquisition of a 40% equity interest in Gasmig. As a condition to such investment, Petrobras and CEMIG entered into aShareholders Agreement in which CEMIG agreed to with Petrobras and itssubsidiaries to share in the management of Gasmig.  See “Item 10- Additional Information ––Material Contracts –– Gasmig Shareholders Agreement and Association Agreement”.

 

We expect that the association with Petrobraswill expand Gasmig’s distribution capacity, as our ability to offer natural gasto our customers will increase significantly with the implementation ofPetrobras’s investments in pipelines.  Weexpect that Gasmig’s capital expenditure for 2005 will be mostly used for theexpansion of our distribution network in highly industrialized areas of MinasGerais.

 

Gasmig is not a consolidated subsidiary inour financial statements as of December 31, 2004, in accordance withEmerging Issues Task Force (“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.”  We consolidated Gasmig’srevenues and expenses 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.

 

#### *Telecommunications, Internet and Cable Television*

#### * *

On January 13, 1999, we incorporatedEmpresa de Infovias S.A. in Minas Gerais, Brazil, as a joint venture with AESForça Empreendimentos Ltda., an affiliate of AES Corporation Group.  Currently, we own 99.94% of the common sharesof Empresa de Infovias S.A.  Empresa deInfovias S.A. has an optical fiber-based long-distance communications backboneinstalled along our power grid using optical ground wire cables.  This communications backbone is connected toan access network that is based on hybrid fiber-coaxial cable technology and isdeployed along our power grid.  We leaseour network infrastructure to Empresa de Infovias S.A. pursuant to a 15-yearoperating lease agreement entered into on March 31, 2000.  Pursuant to Brazilian telecommunications law,we also make our network infrastructure available to other telecommunicationsproviders interested in leasing it.

 

Empresa de Infovias S.A. started its businessoperations in January 2001.  Themain telecommunication services provided by Empresa de Infovias S.A. throughits network are signal transportation and access, both for point-to-point andpoint-to-multipoint applications, delivered mainly to telecommunicationsoperators and Internet

 

41

----

 

service providers on a clear channel basis.  Empresa de Infovias S.A. is also extendingits broadband Internet services, currently available in the cities of BeloHorizonte, Poços de Caldas and Barbacena, to other cities in Minas Gerais.

 

Empresa de Infovias S.A. provides the networkfor cable television service in 12 cities in Minas Gerais pursuant to a 15-yearservice agreement with WAY TV Belo Horizonte S.A., or WAY TV, and BrasilTelecomunicações S.A., each a holder of concessions to provide cable televisionand Internet service in certain cities in Minas Gerais, under which Empresa deInfovias S.A. allows these companies to use its network infrastructure.  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.  At December 31, 2004, these twocompanies had approximately 43,990 cable television subscribers and 20,333Internet service subscribers.

 

Empresa de Infovias S.A. holds a 69.25%equity interest in WAY TV, including 49.9% of its common shares.  The control of WAY TV is exercised by Empresade Infovias S.A. and CLIC—Clube de Investimentos dos Empregados da Cemig, orCLIC, which owns 1.1% of WAY TV’s common shares, through a shareholders’agreement.  Under this agreement, CLIChas agreed to vote in accordance with Empresa de Infovias S.A.’s interests atthe WAY TV shareholders’ meetings and board of directors.  To date, Empresa de Infovias S.A. hasinvested approximately R$62.6 million in WAY TV.

 

Empreasa de Infovias S.A. also providesintracompany data transmission services to us pursuant to a five-year agreementsigned in 2001.  We use this service forinternal communications as well as for certain communications with ourcustomers.

 

In September 2002, Empresa de InfoviasS.A. signed an agreement with us pursuant to which we are to providegeo-referenced information and related services to Empresa de Infovias S.A.

 

During 2004, Empresa de Infovias S.A. hadoperating revenues of R$71.0 million, of which R$30.9 million related to theprovision of telecommunication services and R$40.1 million related to theprovision of cable television and Internet services.

 

Empresa de Infovias S.A.’s capital expendituresfor the past four years were R$196.3 million. Empresa de Infovias S.A.’s capital expenditures for 2005 will be mostlyused for expansion of its telecommunications network.

 

#### *Consulting and Other Services*

#### * *

We provide consulting services to governmentsand public utility companies in the electricity industry in order to deriveadditional revenues from the technology and expertise we have developed throughour operations.  During the past eightyears, 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 createdEfficientia S.A., referred to as Efficientia, in Minas Gerais, to provideproject efficiency optimization solutions and operation and management servicesto energy supply facilities.  We have a100% interest in Efficientia, which began operating in 2003.  In 2004, although the Brazilian economiccontext was favorable to productive activities in general, Efficientia posted aloss of R$1.4 million, largely caused by factors other than its businessmanagement, as described below.

 

In its second year of operations, Efficientiastill depended, for a large part of its sales revenue, on CEMIG’s EnergyEfficiency Program.  This program issubject to numerous requirements by ANEEL, including a timetable for approvalof the projects presented, with a view to their being executed in theimmediately subsequent year.  Theportfolio of projects presented for approval in November 2003, with a viewto implementation and invoicing for sales revenue in 2004, was not convertedinto revenues in 2004.  This was due tothe significant delay in the analysis and approval by ANEEL which, instead ofcomplying with its requirement to approve the project within a maximum periodof two months, did not approve the program until October 2004.

 

42

----

 

## **Environmental Matters**

## ** **

#### *Overview*

#### * *

Our generation, transmission and distributionactivities are subject to comprehensive federal and state legislation relatingto the preservation of the environment. See “The Brazilian Power Industry—Environmental Regulations” in AnnexA.  The primary environmental authoritiesin the State of Minas Gerais are *FundaçãoEstadual do Meio Ambiente* (State of Minas Gerais EnvironmentalFoundation), or FEAM, Instituto Mineiro de Gestão das Águas (State of MinasGerais Water Management Institute), or IGAM, *Secretariade Meio Ambiente e Desenvolvimento Sustentável* (State Secretariatfor the Environmental and Sustainable Development), or SEMAD, and *Conselho Estadual de Política Ambiental*(State of Minas Gerais Environmental Policy Council), or COPAM.  At the Federal level, the main authorities are *Conselho Nacional de Meio Ambiente*(National Environment Council), or CONAMA, *InstitutoBrasileiro do Meio Ambiente e dos Recursos Naturais**Renováveis* (the Brazilian Institute of theEnvironment and Natural Renewable Resources), or IBAMA, and *Agência Nacional de Águas*(National WaterAgency), or ANA.

 

We believe that we are in compliance in allmaterial respects with the relevant laws and regulations.

 

In2003, we received the ISO 14001:1996 Certification from Det Norske Veritas, orDNV, related to the Environmental Management System of Hydroelectric Facilityof Nova Ponte, concerning all activities related to Hydroelectric EnergyGeneration, Reservoir Operation and Management of a Natural PrivateReserve.  In addition, DNV also issuedcertifications for some of our distribution systems, including their respectiveadministrative offices, covering the municipalities of Alfenas, Divinopolis,Varginha, Montes Claros and Pouso Alegre, among others. Such certificationsattest to the compliance of such facilities with the Environmental ManagementSystem - Level 1, which is CEMIG’s internal environmental regulation. In 2004,for the fifth consecutive year CEMIG was selected to be a component of DowJones Sustainability Index (“DJSI World Index”).

 

In accordance with our environmental policy,we have established various programs for prevention and control of damageaiming at limiting our risks related to environmental issues.

 

In 2004 we invested approximately R$123million in environmental compliance projects for plant and equipment and thevehicle fleet, and in the implementation of new projects, and also spent R$19million on operational and maintenance expenses for our current activities,such as final disposal of waste, putting environmental management systems inplace, audits, planting of riverside forests, fish cultivation, putting inplace tree pruning and oil policies, environmental education programs,maintenance of conservation units, training and other activities.  Theseamounts also include R$3 million corresponding to environmental researchand development projects developed with universities and research institutes.

 

#### *Licensing*

#### * *

Applicable law in Brazil requires thatlicenses be obtained in connection with the construction, installation,expansion and operation of any facility that utilizes environmental resources,causes environmental degradation, pollutes or has the potential to causeenvironmental degradation or pollution or harm archaeological wealth.  Generally, state governments manage the environmentallicensing process for facilities that are to be built within theirterritories.  However, the FederalGovernment manages the environmental licensing process for facilities that areexpected to have an environmental impact on more than one state and/or arelocated between two or more states.

 

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

 

43

----

 

Gasmig’s distribution of natural gas throughpipelines in Minas Gerais is also subject to environmental control.  We believe that all  licenses for the regular operation of Gasmig’sactivities have been obtained.

 

*Corrective Environmental Operation Licensing*

 

Pursuant to Resolution No. 6, dated September 16,1987, of the *Conselho Nacional de MeioAmbiente* (the Brazilian Environmental Council), or CONAMA, environmentalimpact assessment studies must be undertaken, and a corresponding environmentalimpact assessment report must be prepared, for all major electric generationfacilities built in Brazil after February 1, 1986.  While studies are not required for facilitiesbuilt prior to February 1, 1986, such facilities must obtain correctiveenvironmental operation licenses, which may be acquired by filing a formcontaining certain information regarding the facility in question.

 

Federal Law No. 9,605, dated February 12, 1998, sets forthpenalties for facilities that operate without environmental licenses.  In 1998, the Federal Government issuedProvisional Measure No. 1,710 (currently Provisional Measure No. 2,163/41),which establishes the potential for project operators to enter into agreementswith relevant environmental regulators for the purpose of coming intocompliance with Federal Law No. 9,605/98. Accordingly, we have been negotiating with the *Instituto Brasileiro do Meio Ambiente e dos RecursosNaturais**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.  Generation facilities located within theState of Minas Gerais fall within the jurisdiction of FEAM for purposes ofcorrective licensing.  We have agreedwith FEAM to bring our facilities located in Minas Gerais into compliance on agradual basis.  We do not currentlyanticipate any costs and commitments in connection with any recommendationsthat may be made by IBAMA and FEAM.  Wecurrently have operating licenses for the following facilities: (i) hydroelectricplants: Miranda, Nova Ponte, Igarapava, Porto Estrela, Sá Carvalho, Funiland  Queimado,  (ii) small hydroelectric plants: PaiJoaquim, Rio de Pedras, Santa Luzia, Salto dos Moraes, Poquim and Piçarrão, (iii) thermoelectricplants: Barreiro and Formoso, and (iv) the wind farm: Morro do Camelinho.

 

Our Emborcação, São Simão, Jaguara and VoltaGrande**hydroelectric power plants need toobtain corrective environmental operation licenses, since they all beganoperating prior to February 1986. In 2004, after a technical inspection by IBAMA of the facilities andareas of influence of the Jaguara andVolta Grande**hydroelectricpower plants, a reference report was issued for the preparation ofenvironmental impact studies for the obtaining of corrective environmentallicensing for the Emborcação, Jaguara,São Simão and Volta Grande**plants and thetransmission systems associated with them. At present we are preparingthese studies for submission to IBAMA.

 

The environmental licenses, either issued bystate or federal bodies, are subject to several conditions imposed in light ofthe foreseen environmental impacts.  Inextreme circumstances, the failure to comply with such conditions may result inthe revocation of the license.  Webelieve we are in compliance with the requirements mentioned in our licenses.

 

#### *Compensation measures*

#### * *

According to Federal Law No. 9,985,dated July 18, 2000, and corresponding Decree No. 4,340, dated August 22,2002, the companies whose activities are deemed to cause high environmentalimpacts are required to invest in protected areas in order to offset thoseimpacts.  These companies are required toinvest at least 0.5% of total amounts invested in implementation of itscorresponding project in activities and areas defined by environmental agents.

 

During the licensing procedure, in light ofthe environmental impacts identified by the environmental assessment studiespresented by the operator, environmental bodies may determine the amount to beinvested and which protected areas shall be benefited.

 

The criteria for environmental and socialcompensation have not been defined, and there is a possibility that requestsfrom environmental agencies, the Public Attorneys’ Office, NGOs or affectedpopulations may be added to those traditionally proposed.  Due to these uncertainties, licensing(including corrective licensing), timing

 

44

----

 

and budgets of new projects, and even their feasibility, may beaffected.  Discussions are currently inprogress with official environmental bodies (at both the federal and statelevel) for the purpose of establishing criteria to govern environmentalcompensations.

 

A work groupthat has been created in the Brazilian Federal Government is developing aresolution concerning environmental compensation measures which, ifimplemented, could have an effect on us.

 

#### *Fishways*

#### * *

The dams ateach of our hydroelectric generation facilities can put fish that inhabit theadjoining reservoirs in danger.  In orderto reduce the impact of these facilities on nearby fish populations, the StateGovernment enacted State Law No. 12,488, dated April 9, 1997, whichimposes measures assuring that migratory fish that pass through dams will beredirected to fishways, through which they can pass safely.  As of December 31, 2004, we had fishwayprojects installed at our Igarapé, Salto de Moraes, Funil and Igarapavafacilities.  In April 2002 we sentCOPAM a study relating to our dams.  In July 2002we received a response from SEMAD that requires us to provide additionalstudies relating to the feasibility of installing fishways in our dams locatedin Minas Gerais.  We executed anagreement with a non-governmental organization, named SMC (*Sociedade Mineira de Cultura*) and theuniversity PUCMinas (Pontificia Universidade Católica de Minas Gerais) in orderto proceed with the studies for SEMAD in connection with the Gafanhoto, Cajuruand Volta Grande hydroelectric facilities. We are also evaluating the options for the construction of fishways atMiranda and Nova Ponte hydroelectric plants. The studies that are in progress are not yet conclusive as to theneed for the provision of fishways. 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 future decisions by theenvironmental authorities, or changes in the environmental legislation, oreven new information obtained from the studies which are in progress, maylead to a need for the construction of fishways at our hydroelectricgeneration facilities.

 

## **Urban occupation ofrights of way**

## ** **

Our piped natural gas distribution networksare underground, crossing through inhabited areas, and using public rights ofway in common with underground piping utilities operated by other publicconcession holders and public agencies. This increases the potential for risk of undue work without priorcommunication and consultation of our gas distribution network registers, andthere is a possibility of this causing accidents, with potentially significantpersonal, property and environmental damage. However, all our gas networks are explicitly, and intensively, markedand 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.

 

*Transmissionlines*:  Several of thesafety bands under our transmission lines have been occupied by unauthorizedfacilities (buildings, etc.) and dwellings. These occupations generate risks of electric shock and accidentsinvolving people living at the location, and constitute an obstacle tomaintenance of our electricity system. It is thus necessary to solve this situation over the coming years,either removing some of the occupants, or introducing improvements to make itpossible to live with these invasions. Faced with the risks associated withthis situation, we planned two lines of action for the coming years.  The first is preparation of a documententitled “Diagnosis of areas invadedand under risk of invasion, for strengthening of inspection activities,including installation of improvements in locations classified as having highinvasion risk”.  In 2004 studieswere begun for the contracting of a company specialized in geo-referencedmapping, which will identify the areas with potential for invasion, makingpossible decisions on measures and procedures in relation to control,monitoring and inspection of the transmission line paths where there is a highrisk of invasion.  The second line ofaction involves the evacuation ofareas already invaded.  Thewithdrawal of people from these areas involves payment of indemnities,regularization of electricity connections and the opening of bands for theconstruction of squares and streets.  Inconformity with CEMIG’s risk management, we draw attention to the multi-yearplanning of allocation of funds to achieve withdrawal of some of the occupantsand the execution of local improvements to ensure the safety conditions ofthese areas.

 

45

----

 

## **Environmentalregulations**

## ** **

Environmental issues can significantly impactthe operations of our company.  Forexample, large hydroelectric power plants can require flooding of considerableareas and as a result relocation of a considerable population.  The Brazilian Constitution gives the FederalGovernment, states and municipalities powers to enact laws designed to protectthe environment and issue enabling regulations under these laws.  While the Federal Government has the power topromulgate general environmental regulation, state governments have the powerto enact more stringent environmental regulation.

 

The “Brazilian National Environment System”(SISNAMA – *Sistema Nacional do Meio Ambiente*)was created for the purpose of protecting the 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.  The agencies that merit special attention areCONAMA and IBAMA.  CONAMA carries out orapproves studies and assists and advises the Government Council on the officialorders for government policy on environmental and natural resources, and ondecisions, within its attributed scope, on regulations and other legislative rules applicableto the Brazilian environment.  IBAMAenforces the national environment policy and inspects, preserves and supportsthe use of natural resources.

 

Law No. 6,938/81, of August 31,1981, is known as the Environmental Policy Law, and regulates civil liabilityfor damage to the environment.  In legalterms, this responsibility has an “objective” nature, and is not only strictbut also expands the list of liable parties adopting the principle of joint andseveral responsibilities.  Irrespectiveof the nature of the offending act, demonstration of a 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 licenses does not eliminate environmentalliability.

 

Activities which cause damage to theenvironment may also lead to administrative and criminal fines, under Law No. 9,605,of February 12, 1998 (the Environmental Crimes Law).  The effects of the aforementioned law applyto any person, individual or legal entity, who by any means contributes todamage caused to the environment to the extent of his/her fault, in the amountof the damage caused.  This law providesthat a legal entity may be held liable for conduct deemed harmful to theenvironment, provided that the infraction was committed in its interest orbenefit, upon the decision of its legal or contractual representatives or ofits plenary board.  Management andmembers of the board who are aware of any criminal conduct of another and arethus able to prevent it but do not do so, are, by their omission, alsoconsidered participants in the crime.

 

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

 

In relation to water resources, Law No. 9,433of January 8, 1997 created the National Water Resources Policy, which wasorganized in accordance with the various river basins of Brazil.  This policy is implemented by thegovernmental and non-governmental agencies, and classifies water as a publicasset.  Thus, no individual or companymay appropriate the use of water, and any use of water does not result in absoluteexclusion of all potential users.

 

Also, public authorities must supply ajustification for the concession of rights to use water.

 

The right to use federal water is given bythe National Waters Agency, or ANA (*AgênciaNacional de Águas*), created by Law No. 9,984 of July 17,2000, and regulated by Decree No. 3,692 of December 19, 2000, incollaboration with ANEEL.  As well asgranting these rights, ANA also regulates and supervises the use of federalwater resources and implements the collection of charges for the use of water,at a ratio of 0.75% of the value of the energy generated.  Permission for use of non-federal waterresources must be obtained from the respective state-level environmental/waterresource agency.

 

46

----

 

The National WaterResources Policy also created the need for the grant of permission for the useof water in the production of electricity. At the phase of planning of the plant, application must be made by ANEELto the water resources authorities for reservation of water availability, whichwill be transformed into permission to use water resources and granted togetherwith the grant of concession for commercial operation of hydroelectricenergy.  The plants which already are inoperation, and have the concession grant, automatically also have the grant ofthe water resources right.  However, whenapplication is made for renewal of the concession for commercial use ofhydroelectric energy, grant of the right to use the water resources must alsobe applied for.

 

For the construction of the hydroelectricpower plant, Brazilian electricity companies have to comply with severalenvironmental protection measures. First, an environmental impact study must be prepared by externalexperts, who should make recommendations on how to minimize the impact of theplant on the environment.  The study, inconjunction with a environmental impact assessment report on the projectprepared by the company, is then submitted to the state or federal-level governmentalauthorities for analysis and approval. The project undergoes a process of licensing in three stages, whichincludes a Prior License which indicates the viability of the project, anInstallation License for the beginning of construction, and an OperationLicense for startup of the plant. Environmental licenses also have to be obtained for expansion of theplant or installation of new equipment. It should be mentioned that on basis of the environmental impact studiesconclusions, the issued license is subject to several conditions orrequirements that must be observed; otherwise the licenses may be revoked.

 

Installations that are considered torepresent a considerable environmental impact are obliged by law to allocate aminimum of 0.5% of their total investment costs to the creation ofenvironmental preservation areas.

 

Under the Brazilian Forest Code (*Código Florestal Brasileiro* - Law No. 4,771 of September 15,1965), the land area surrounding water reservoirs, whether it is natural orartificial, is considered to be a permanent preservation area, which representsrestriction on use.  The amendments tothe Brazilian Forest Code introduced by Provisional Measure 2,166-67 of August 24,2001 provide that the operator of a reservoir is obliged to acquire suchsurrounding areas.  This requirement canimpact the economic viability of new hydroelectric undertakings, but has so farnot been enforced.

 

The Forest Policy of the State of MinasGerais (Law No. 14,309 of June 19, 2002) and Decree No. 43,710 ofJanuary 8, 2004 does not oblige the operator to acquire the land areasurrounding the reservoir, but it does demand indemnity for the restriction onuse, in forms provided for by law.

 

These rules, when applicable, will result inadditional costs in connection with in the installation of new hydroelectricpower plants.

 

Any corporate entity involved in activities which cause pollutanteffects, or the potential for pollutant effects, or which involve productswhich are considered dangerous to the environment, is obliged to register withIBAMA.  This registry involves 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 on February 16, 2005.  According to the Kyoto Protocol, thereduction of greenhouse gas emissions through projects designed under the CleanDevelopment Mechanism, or CDM, may be converted into “Carbon Credits”, whichmay be negotiated worldwide. **Legislation that would govern the carbonmarket in Brazil and tax incentives in connection therewith is currently beforeCongress in Brazil. Brazil has great potential to generate Carbon Credits arising from cleanenergy projects that comply with the CDM.

## ** **

CEMIG’s has implemented a strategy to study CDM project developmentopportunities in the carbon market.  Inorder to undertake CDM projects, we are training our professionals, includingthrough courses administered by USAID and the World Bank.  Last year, CEMIG sponsored a course promotedby USAID and the World Bank at the State of Minas Gerais Industry Federation todiscuss CDM projects in the State of Minas Gerais.  We intend to create 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.

 

47

----

 

## **Operational Technologies**

## ** **

We continue to invest in automated monitoringand control equipment in connection with our strategy of increasing efficiencyand further modernizing and automating our generation, distribution andtransmission systems.

 

#### *Load Dispatch Center*

#### * *

The *Centrode Operação de Sistema da Cemig* (System Operation Center), or COS,located at our headquarters in Belo Horizonte, is the nerve center of ouroperations.  The COS is a data clearinghouse and control center that uses fiber optic and coaxial cables, microwavesand other communication technologies to monitor and coordinate our generationand transmission systems in real time, helping to guarantee the security,continuity, and quality of our energy supply. With the restructuring of the Brazilian utility sector, the COS hasbegun operating through the ONS, controlling and supervising 39 substations, 22large plants and 3,017 miles of transmission lines.

 

#### *Regional Distribution Operation Centers*

#### * *

Our distribution network is managed throughseven *Centros de Operações Regionais deDistribuição* (Regional Distribution Operation Centers), orCODs.  The CODs monitor and coordinateour distribution network operations in real time.  The CODs are responsible for the supervisionand control of 350 distribution substations, 228,314 miles of medium voltage distributionlines, 9,995 miles of sub-transmission lines and 5.9 million customers in ourconcession area.

 

There are various systems in use to automateand support the CODs processes including trouble call, field crew management,distribution substation supervision and control, restoration of power,emergency switching, network disconnection and inspection.  Technologies like geographic informationsystem and radio/satellite data communication help to reduce the customerrestoration time and to provide better customer attendance.

 

#### *Geospatial Information & Technology*

#### * *

We are intensively using the geospatial andtechnical document management technology to support and improve engineeringprocesses.  Geo-referenced information ofthe electrical network, satellite and aerial photographs of the concessionarea, diagrams and technical document images are stored in geospatial databasesand can be easily retrieved by computers connected to our Corporate Network,helping technicians to plan, design, construct, operate and maintain thegeneration, transmission and distribution network.  We are using mobile technology in servicedispatch for distribution network maintenance and medium and high-voltagenetwork data acquisition.

 

#### *Internal Telecommunications Network*

#### * *

Our private telecommunications network is one of thelargest in Brazil.  It is comprised ofhigh-performance microwave links with 130 communication stations and totalrange of 1,380 miles, a telephone system with 188 telephone exchanges and amobile communication system with 700 trunking radios and 1,105 radio sets.  We have also developed several projects inassociation with Empresa de Infovias S.A. based on fiber-optic networks thatuses our distribution infrastructure of poles and transmission towers, aimed atintegrating our internal voice, data and image services in order to reduceoperational costs and increase the reliability of the electrical system.

 

#### *Corporate Data Network*

#### * *

Our corporatenetwork integrates enterprise servers (one 350 MIPS Mainframe processing theBilling System and 10 Risc machines for the ERP System), 7,015 Intelmicrocomputers, 306 servers and 877 units of connectivity equipment, serving164 sites in 90 cities of Minas Gerais State. The centralized infrastructureuses modern servers and devices with service level agreements for hardwaremaintenance and software support. The reception of meter reading data, digitalcalculation of electricity bills, and issuance of electricity bills toconsumers in CEMIG’s secondary network were recommended for the ISO-9001:2000certification.

 

48

----

 

#### *Call Centers*

#### * *

We have one call center located in BeloHorizonte.  Our final customers can use atoll-free number to contact a call center to obtain information about theiraccounts and to report service problems. Our call center is integrated with the technologies available in theCODs, allowing us to provide up-to-the-minute information to customers aboutservice issues.

 

#### *Maintenance and Repair Systems*

#### * *

We use several maintenance and repair systemsto minimize unscheduled interruptions in electrical service to ourcustomers.  More than 90% of our serviceinterruptions have resulted from factors such as lightning, fire, vandalism,wind and corrosion on our transmission and distribution networks, which arecomposed largely of steel towers, although we also have wood and concreteoverhead lines.

 

We inspect our transmission lines on averagetwice a year.  The lines are patrolled byhelicopter, car and motorcycle.  We alsouse a Gimbal Camera in the aerial inspections. Our linemen climb most of the towers at least once a year, depending onthe age and the importance of each line for the whole system.  We have continually introduced new predictivetechniques into our maintenance program, as for example corona and infraredinspections.

 

To support emergencies involving fallentowers, we have used modern modular aluminum structures.  Most of our intervention on transmissionlines is done using live line methods. Being the first company in Brazil to use bare hand live line techniquesin the maintenance of transmission lines, we have accumulated, through the lastalmost thirty years, significant experience in this area.  We have trained our staff in this area andhave special vehicles and other necessary tools to support live and dead linemaintenance.

 

We also have crews strategically locatedthroughout the State of Minas Gerais in order to promptly attend to ourtransmission and distribution system needs.

 

#### *Information Security Management*

#### * *

In August 2004 we put in place theCorporate Information Security Plan.  Theprincipal objective of this plan is to prepare an action plan to reduce therisk of loss of information confidentiality, integrity and availability.  The project also aims to adapt the company tothe new legal and regulatory requirements which call for implementation ofvarious security controls.  A specializedconsulting company was contracted, for a period of 11 months, and has beenassisting the Information Security Management team in developing the actionsand projects.

 

In 2004 we installed software for informationsecurity management, completed the Corporate Network security specification,and began the security assessment and implementation for critical informationtechnology assets.

 

## **Management Tools**

## ** **

#### *Enterprise Resource Planning*

#### * *

During the end of 2004, we underwent acomplex process of improvements on our current Enterprise Resource Planning, orERP package (SAP R/3).  The processinvolved an upgrade from version 4.0 into the newer version 4.7 withimprovements on internal processes and controls and the implementation of newfunctionalities.  The new system has newand revised functionalities covering accounting, cost and funds control,budgeting, investment management, treasury, cash flow management, qualitycontrol, project management, inventory management, maintenance, asset control,human resources management (including payroll, time management and personneldevelopment), travel management, sales management and a new workflowfunctionality covering the finance and supply chains.

 

49

----

 

The new solution includes, beyond processreview, modernization and legacy systems integration, with new and improvedhardware, software and processes on its first phase that went live on January 10,2005 and supported our unbundling project, approved by ANEEL on December 20,2004.

 

The next project phase (expected to be livein July 2005) will pilot improvements on our strategic managementfunctionalities, including balanced scorecard, new data warehousefunctionality, long-term cash flow monitoring and financial consolidation.

 

#### *Quality Management Systems*

#### * *

In 1991, we instituted a company-wide qualitycontrol program called “Total Quality.” As part of the Total Quality Program, we adopted the InternationalStandardization Organization Project in 1999, through which we certifydifferent parts of our operations and management as being of superior qualityaccording to international standards known as ISO 9000 and ISO 14000.  We also certify parts of our operationsaccording to internally created criteria.

 

In addition to the continued expansion in theimplementation of the Quality and Environment Management systems in ouractivities and processes, we also have in progress the implementation of theHealth and Safety Management System, providing control in accordance with thestandards for this type of system.

 

Based on experience gained in the last few years, we have prepared theCemig Management System Manual, which integrates the Quality, Environment andHealth and Safety Management Systems. The integration of the management systems, to be carried out in theareas of interest to the Company, will ensure functionality in the activitiesexecuted and greater efficiency in the results.

 

We have received ISO 9001/2000 certificationfor our business, including certain customer service offices, call centers,laboratories, repair shops, engineering teams and the São Simão hydroelectricpower plant, which represented 29% of our installed capacity as of December 31,2004.

 

In February 2000, the Nova Pontehydroelectric power plant, with an installed capacity of 510 MW, received ISO14001 certification from Det Norske Veritas – DNV.  The certification includes the 500 squarekilometer (193 square mile) reservoir as well as the 2,850 hectare (11 squaremile) Galheiro nature reserve.  NovaPonte is the first large power plant in Latin America to receive this certification.

 

****In 2004, onetransmission and three distribution units, covering 161 municipalities, 54substations, more than 93 miles of distribution lines, and more than 5 miles oftransmission lines were certified under the internally created criteria that werefer to as the CEMIG EMS (Environmental Management System).  A materials storage and logistics warehousealso received this certification.** **Products and services certifiedinclude: new customer connections; billing; collection; product sales andservices; network expansion and improvement; network operation; public lightingmaintenance and restoration; overhead lines and network maintenance andinspection; electric system planning; and substation and equipment maintenanceand inspection.

 

#### *Risk Management*

#### * *

With the assistance of a leading consulting firm chosen through a formalselection process, we began establishment of a Corporate Risk Management Systemin 2003, and consolidated it in 2004 in connection with our restructuring.  As holder of a concession in the Brazilianelectricity sector, we operate in environments where factors such as corporaterestructurings, regulations issued by government agencies, technologicaldevelopment, globalizations and changes in the consumer market generateuncertainties and threats.

 

The implementationof a coherent risk vision and strategy at the corporate level is a newmanagement trend, encouraged not only by the requirements of the Sarbanes-OxleyAct and the methods recommended by the Committee of Sponsoring Organizations(COSO II), but also by the perception that management of risk is an essentialpart of a sustainable development philosophy which aims to create value forshareholders.

 

50

----

 

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

 

In 2004, the structure of corporate risks that was prepared in 2003 wasrevised and updated, to adapt it to the profound regulatory changes to whichthe whole Brazilian electricity sector was subjected – most importantly Law10,848, regulated by Decree 5,163.  Wealso put in place the functional structure of the risk management system, withthe creation of CEMIG ́s Corporate Risk Management Committee, finalizing anapproved version of the Corporate Risks Management Policy, the Corporate RiskManagement Procedures Manual, and licensing of the information technology toolwhich supports this activity.

 

In 2003, CEMIG’sElectricity Risks Management Committee, or CGRE, was created to proposepolicies and procedures for approval by the executive officers 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.

 

The CGRE was veryactive in 2004, analyzing the recent changes in the Brazilian electricitysector and their impact on CEMIG. Based on its analyses of market, price,regulatory and legal risks, the committee proposed guidelines for the structureof contracts for the sale of electricity to Free Consumers, through the auctionprocedures held by the Company. It also gave support to the decisions of theexecutive officers in relation to the Company’s participation in the firstExisting Energy Supply Auction, held on December 7, 2004 by the CCEE. Basedon risk analyses, it proposed the maximum volumes that could be sold and theamounts purchased by the distributor in that auction.

 

#### *Management of Financial Risks*

#### * *

In 2004, we continued putting in place the “*Risk Control*” software for management of financial risks, tomonitor the risks associated with the carrying out of transactions in thefinancial markets.  Use of this software,associated with implementation of the risk management methodology, is designedto give our managers capacity to recognize the existing and potential risks andto control them, and to operate proactively in relation to their environment offinancial risks when implementing plans of action.  The delay in fully implementing the softwarewas due to the mobilization of the task force in the upgrading of SAP R/3.

 

## **Property, Plant andEquipment**

## ** **

Our principal properties consist of the powergeneration plants and transmission and distribution facilities described inthis Item 4.  Our net book value of totalproperty, plant and equipment, including our investment in certain consortiathat operate electricity generation projects, was R$11,191 million at December 31,2004 (including ongoing construction projects). Generation facilities represented 52.4% of this net book value,transmission and distribution facilities represented 43.8% and othermiscellaneous property and equipment, including natural gas andtelecommunication facilities, represented 3.8%. The average annual depreciation rate applied to these facilities was2.5% for hydroelectric generation facilities, 3.4% for transmission facilities,4.9% for distribution facilities, 7.7% for administration facilities, 6.0% fornatural gas facilities and 7.9% for telecommunication facilities.  Our facilities are generally adequate for ourpresent needs and suitable for their intended purposes.

 

# **Item 5.**           Operatingand Financial Review and Prospects

# ** **

*You should read theinformation contained in this section together with our financialstatements contained elsewhere in this annual report.  The following discussion is based on ourfinancial statements, which have been prepared in accordance with U.S. GAAP andpresented in reais.*

 

51

----

 

#### ***General***

#### * *

We are a state-controlled energy companyengaged,through our subsidiaries, primarily in the generation, transmission anddistribution of electricity in Minas Gerais. According to ANEEL, at December 31, 2004, we were the seventhlargest electric power generation concessionaire in Brazil as measured by totalinstalled capacity, and for the year ended December 31, 2004, we were thelargest electric power distribution concessionaire in Brazil, as measured byGWh of energy sold to final customers. We supplied approximately 97% of the electricity consumed in Minas Geraisduring the year ended December 31, 2004. See “Item 4.  Information on theCompany—Customers and Billing.”  At December 31,2004, we generated electricity at 47 hydroelectric plants, four thermoelectricplants and one wind farm and had a total installed generation capacity of 5,949MW, of which the hydroelectric plants accounted for 5,764 MW.  See “Item 4. Information on the Company—Generation and Purchase of Electric Power.”  The State Government as our controllingshareholder establishes our operating and long-term strategy.

 

The following are our subsidiaries as of December 31,2004:

 

•                                          Cemig Geração e Transmissão S.A. (100% interest).  Cemig Generation and Transmission, which as of January 1,2005 is engaged in the generation and transmission of energy.

 

•                                          Cemig Distribuição S.A.(100% interest): Cemig Distribution, which as of January 1, 2005 isengaged in the distribution of energy.

 

•                                          Sá Carvalho S.A. (100%interest).  Sá Carvalho S.A. isengaged in the production and sale of electric energy and holds the concessionto operate the Sá Carvalho hydroelectric power plant.

 

•                                          Rosal S.A.(100% interest).  Rosal S.A. is engagedin the production and sale of electric energy and holds the concession tooperate Rosal hydroelectric power plant. See Note 10 to our consolidated financial statements.

 

•                                          Usina Térmica Ipatinga S.A. (100%interest).  Usina Térmica IpatingaS.A. is an SPP engaged in the production and sale of electric energy at theIpatinga thermoelectric and steam power plant.

 

•                                          Companhia de Gásde Minas Gerais—GASMIG (55%interest).  Gasmig is engaged inthe acquisition, transportation and distribution of natural gas.  In December 2004, CEMIG sold 40% of itsinterest in Gasmig.  See note 10 to ourconsolidated financial statements.

 

•                                          Empresa de Infovias S.A. (99.94%interest).  The principalactivities of Empresa de Infovias S.A. are rendering telecommunicationsservices and developing activities related thereto, through multiservicenetworks using optical fiber cable, coaxial cable and other electronicequipment. Empresa de Infovias S.A. owns 69.25% of the capital stock of Way TVBelo Horizonte S.A., a cable TV and internet services provider in certaincities of the State of Minas Gerais.

 

•                                          EfficientiaS.A. (100% interest).  Efficientia is engagedin rendering efficiency, optimization and energy solutions services, as well asproviding operating and maintenance services, to energy supply facilities.  Efficientia initiated operations in the firstquarter of 2003.

 

•                                          HorizontesEnergia S.A. (100% interest).  HorizontesEnergia is engaged in the production and sale of electric energy, as anindependent power producer, at the Machado Mineiro and Salto do Paraopebahydroelectric power plants, located in the State of Minas Gerais, and the SaltoVoltão and Salto do Passo Velho hydroelectric power plants, located in theState of Santa Catarina.  HorizontesEnergia initiated operations in the first quarter of 2003.

 

•                                          Companhia de Transmissão Centroestede Minas (51% interest). Companhia de Transmissão Centroeste de Minaswill be responsible for building, implementing, operating and maintaining the345 kV transmission line from the substation of the Furnas Hydroelectric PowerPlant and a substation located in Pimenta.

 

52

----

 

We also have a 100% interest in each of thefollowing companies:  Usina TermelétricaBarreiro S.A.; CEMIG PCH S.A.; CEMIG Trading S.A.; and Cemig Capim BrancoEnergia S.A.  These companies wereorganized to conduct specific projects in the electric energy sector and havenot yet commenced operations.

 

Our consolidated financial statements as ofand for the years ended December 31, 2004 and 2003 include the financialresults of CEMIG and all of our subsidiaries (operational and pre-operational)described above.  In 2004, we enteredinto a Shareholders’ Agreement with Petrobras and Gaspetro in connection withthe sale of 40% of our equity interest in Gasmig.  Gasmig’s revenues and expenses were includedin our consolidated Statement of Income up to December 15, 2004.  Gasmig’s assets and liabilities are notincluded in our consolidated financial statements as of December 31,2004.  See Notes 2 and 10 to ourconsolidated financial statements. Additionally, we have a minority interest in the following companies:

 

•                                          Central Hidrelétrica Pai JoaquimS.A. (48.5% interest).  CentralHidrelétrica Pai Joaquim S.A. is engaged in the production and sale of ElectricEnergy as an independent power producer.

 

•                                          Central Termelétrica de Cogeração S.A.(48.5% interest).  CentralTermelétrica de Cogeração S.A. is engaged in the production and sale ofthermoelectric energy, as an independent power producer, through the Barreirothermoelectric plant, located on Vallourec & Mannesmann’s premises inthe State of Minas Gerais.

 

•                                          Companhia Transleste de Transmissão(25.0% interest).  CompanhiaTransleste de Transmissão will be responsible for building and operating the345 kV transmission line connecting a substation located in Montes Claros andthe substation of the Irapé Hydroelectric Power Plant.

 

•                                          Companhia Transudeste de Transmissão(24.0% interest).  CompanhiaTransudeste de Transmissão will be responsible for building, implementing,operating and maintaining the 345 kV transmission line from Itutinga to Juiz deFora.

 

•                                          Companhia Transirapé de Transmissão(24.4% interest).  CompanhiaTransirapé de Transmissão will be responsible for constructing, implanting,operating and maintaining the 230 kV transmission line LT Irapé – Araçuaí.

 

## **Critical AccountingEstimates**

## ** **

The preparation of our consolidated financialstatements in conformity with U.S. GAAP requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting periods.  We evaluate ourestimates on an ongoing basis and base them on a combination of historical experiencesand various other assumptions that we believe to be reasonable under thecircumstances.  Actual results coulddiffer materially from those estimates. Our critical accounting policies that affect our more significantjudgments used in the preparation of our consolidated financial statements areset forth below.

 

#### *Regulatory assets*

#### * *

Due to changes in the electric utilitiessector in Brazil in 2001 and 2002 and related acts by regulatory bodies of theFederal Government, we have concluded that because the rate-setting structurein Brazil was designed to recover certain allowable costs, we are subject tothe provisions of Statement of Financial Accounting Standards No. 71“Accounting for the Effects of Certain Types of Regulation,” or SFAS No. 71.

 

SFAS No. 71 requires rate-regulated public utilities such as CEMIGto record certain costs and credits allowed in the rate-setting process indifferent periods than for non-regulated entities.  These costs and credits are deferred asregulatory assets and are recognized in the consolidated statement ofoperations at the time 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 billed and collected as adirect result of

 

53

----

 

the inclusion of the costs in an increasedrate set by the regulator.  The deferredregulatory asset is realized when we collect the related costs through billingsto customers.  ANEEL performs a ratereview 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.  We evaluate and revisethe accounting for our regulatory assets on an ongoing basis as new regulatoryorders are properly issued and account for our activities under SFAS No. 71.  As we recognize regulatory assets inaccordance with rulings of the regulatory authorities of the Federal Government,future regulatory rulings may impact the carrying value and accountingtreatment of our regulatory assets.

 

During 2001, the electricity markets insignificant portions of Brazil experienced rationing, or reduced availabilityof electricity to customers, due to low rainfall, reduced reservoir levels andBrazil’s significant dependence on electricity generated from hydrologicalresources.  These factors resulted inlower sales.  In December 2001,electricity concessionaires in Brazil, including us, reached an industry-wideagreement with the Federal Government that provided resolution to rationingrelated issues as well as certain electricity rate-related issues.  This agreement, known as the GeneralAgreement of the Electricity Sector, generally allows for increased rates to becharged to electric power consumers until the amounts lost by the powergeneration and distribution concessionaires as a result of the rationing arerecovered.  The rate increases set forthin the General Agreement of the Electricity Sector intended to reimburserationing-related losses are expected to remain in effect from January 2002for an average of 72 months.  However, noassurance can be given that the full amount of the rationing-related losses weincurred will be recovered over this period.

 

In addition, we are subject to the provisionsof Emerging Issues Task Force Issue No. 92-07 “Accounting byRate-Regulated Utilities for the Effects of Certain Alternative RevenuePrograms,” or EITF 92-07, which establishes a 24-month limit forcollection of regulatory assets related to billing losses.  Accordingly, we were required to estimatethis asset recovery based on assumptions of future billings.

 

We perform periodic valuations of therecoverability of our deferred regulatory assets in order to determine whetherimpairment provisions are necessary based on applicable ANEEL regulations.  We recorded a loss provisionaccordingly.  This provision is based onprojections prepared by us, which projections may change in response to regulatorychanges and other developments.  SeeNotes 2(q) and 4 to our consolidated financial statements.  If ANEEL disallows a material amount ofcapitalized costs to be included in future rates, the write-off of theregulatory assets may have a material adverse impact on our operating results.

 

*Valuation of assets*

 

We have long-lived assets, including powergeneration plants.  Many of these assetsare the result of recent capital investments and have not yet reached a maturelife cycle in construction.  We assessthe carrying amount and potential impairment of these long-lived assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable.  Factors weconsider in determining whether an impairment review is necessary include asignificant underperformance of the assets relative to projected futureoperating results and significant negative industry or economic trends.  We determine when an impairment review isnecessary through a comparison between the expected undiscounted future cashflows and the carrying amount of the asset. If the carrying amount of the asset is the larger of the two amounts, animpairment loss is recognized by the amount that the carrying amount of the assetexceeds the fair value of the asset.  Thefair value is determined by quoted market prices, appraisals or the use ofvaluation techniques such as expected discounted future cash flows.  We must make assumptions regarding theseestimated future cash flows and other factors to determine the fair value ofthe respective assets.  In determiningestimated future cash flows, we consider historical experience as well asfuture expectations and estimated future cash flows are based on expectedfuture rates and expected future customer demand.  A significant reduction in actual cash flowsand estimated cash flows may have a material adverse impact on our operatingresults and financial condition.

 

*Accrual forcontingencies*

 

We are party to certain legal proceedings inBrazil arising in the normal course of business regarding tax, labor, civil andother issues.

 

54

----

 

We account for contingencies in accordancewith 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 forcontingencies requires significant judgment by management concerning theestimated probabilities and ranges of exposure to potential liability.  Management’s assessment of our exposure tocontingencies could change as new developments occur or more informationbecomes available.  The outcome of thecontingencies could vary significantly and could materially impact our consolidatedresults of operations, cash flows and financial position.  Management has applied its best judgment inapplying SFAS No. 5 to these matters.

 

*Employeepost-retirement benefits*

 

We sponsor a defined-benefit pension plan anddefined-contribution pension plan covering substantially all of ouremployees.  We have also establishedpost-retirement health care plans and pay life insurance premiums.  We account for these benefits in accordancewith SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 106“Employers’ Accounting for Post-retirement Benefits other than Pensions.”  We have applied SFAS 132(R) “EmployersDisclosures about Pensions and Other Post-retirement Benefits” to discloseinformation about pension plans and other post-retirement benefit plans.

 

The determination of the amount of ourobligations for pension and other post-retirement benefits depends on certainactuarial assumptions.  These assumptionsare described in note 17 to our consolidated financial statements and include,among others, the expected long-term rate of return on plan assets andincreases in salaries and healthcare costs. In accordance with U.S. GAAP, actual results that differ from ourassumptions are accumulated and amortized over future periods and generally affectour recognized expenses and recorded obligations in such future periods.  While we believe that our assumptions areappropriate, significant differences in actual results or significant changesin our assumptions may materially affect our pension and other post-retirementobligations.

 

*Deferred taxes*

 

We account for income taxes in accordancewith SFAS No. 109 “Accounting for Income Taxes,” which requires an assetand liability approach to recording current and deferred taxes.  Accordingly, the effects of differencesbetween the tax basis of assets and liabilities and the amounts recognized inour consolidated financial statements have been treated as temporarydifferences for the purpose of recording deferred income tax.

 

We regularly review our deferred tax assetsfor recoverability and establish a valuation allowance based on historicaltaxable income, projected future taxable income, and the expected timing of thereversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or ifthere is a material change in the actual effective tax rates or time periodwithin which the underlying temporary differences become taxable or deductible,we could be required to establish a valuation allowance against all or asignificant portion of our deferred tax assets resulting in a substantialincrease in our effective tax rate and a material adverse impact on ouroperating results.

 

*Depreciation*

 

Depreciation is computed using thestraight-line method, at annual rates based on the estimated useful lives ofthe assets, in accordance with ANEEL regulations and industry practice inBrazil.  To the extent that the actuallives differ from these estimates, there would be an impact on the amount ofdepreciation accrued in our 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.

 

*Allowance fordoubtful accounts*

 

We record an allowance for doubtful accountsin an amount that we estimate to be sufficient to cover presently foreseeablelosses.

 

55

----

 

We continuously monitor collections andpayments from customers and review and refine our estimation process.

 

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

## ** **

 In July 2003,the Emerging Issues Task Force stated in EITF Issue No. 03-11, orEITF 03-11, that the determination as to whether realized gains andlosses on derivative contracts not held for trading purposes should be reportedon a net or gross basis is a matter of judgment that depends on the relevantfacts and circumstances and the economic substance of the transaction.  In analyzing the facts and circumstances,EITF Issue No. 99-19 and Opinion No. 29, “Accounting forNon-monetary Transactions,” should be considered.  EITF 03-11 is effective fortransactions or arrangements entered into after September 30, 2003.  The adoption of EITF 03-11 did not havea material effect on the Company’s financial statements.

 

 In December 2004, the FinancialAccounting Standards Board (the “FASB”) issued Statement of Financial AccountingStandards No. 153, “Exchanges of Non-monetary Assets - an amendment of APBOpinion No. 29” (“SFAS 153”), which amends Accounting Principles BoardOpinion No. 29, “Accounting for Non-monetary Transactions” to eliminatethe exception for non-monetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of non-monetary assets thatdo not have commercial substance.  SFAS153 is effective for non-monetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005.  TheCompany will apply SFAS 153 in the event that exchanges of non-monetary assetsoccur in fiscal periods beginning after June 15, 2005.

 

## **Analysis of ElectricitySales and Cost of Electricity Purchased**

## ** **

Electricity rates in Brazil are set by ANEEL,which has the authority to readjust and review rates in accordance with theapplicable provisions of the concession contracts.  See Annex A—”The Brazilian PowerIndustry—Rates for the Use of the Distribution and Transmission Systems”.

 

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

 

In general, rates on electricity that wepurchase are determined by reference to the capacity contracted for as well asthe volumes actually used.  In the caseof Itaipu, we are committed to purchase 17.3% of the amount of its capacitythat Brazil is required to purchase at a fixed price denominated in dollarspaid three times a month at exchange rates determined at the time of eachpayment.

 

The following table sets forth the averagerate (in *reais* per MWh) andvolume (by GWh) components of electricity sales and purchases for the periodsindicated.  The term “average rate”refers to revenues for the relevant class of customers divided by the MWh usedby such class and does not necessarily reflect actual rates and usage by aspecific class of end-users during any particular period.  The figures included in the table include theenergy sold by Barreiro and Pai Joaquim, which were not consolidated in ourfinancial statements.

 

56

----

 
| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Electricity  Sales:**                   |       |                             |       |   |   |   |   |
| Average rate  to final customers (R$/MWh) |       |                             |       |   |   |   |   |
| Industrial  rate                          |       | 154.86                           |       | 132.35 |   | 100.06 |   |
| Residential  rate                         |       | 406.07                           |       | 356.87 |   | 281.60 |   |
| Commercial  rate                          |       | 355.95                           |       | 306.00 |   | 240.94 |   |
| Rural rate                                |       | 214.52                           |       | 186.76 |   | 147.80 |   |
| Public  services rate and others          |       | 236.99                           |       | 201.78 |   | 158.80 |   |
|                                      |       |                             |       |   |   |   |   |
| Total sales  to final customers (GWh)     |       |                             |       |   |   |   |   |
| Industrial  customers                     |       | 22,969                           |       | 21,715 |   | 21,906 |   |
| Residential  customers                    |       | 6,526                            |       | 6,529 |   | 6,360 |   |
| Commercial  customers                     |       | 3,537                            |       | 3,402 |   | 3,283 |   |
| Rural  customers                          |       | 1,846                            |       | 1,783 |   | 1,705 |   |
| Public  services and other customers      |       | 2,498                            |       | 2,478 |   | 2,330 |   |
|                                      |       |                             |       |   |   |   |   |
| Average rate  (R$/MWh)                    |       | 226.19                           |       | 197.12 |   | 151.64 |   |
| Total  revenues (millions of R$)          |       | 8,560                            |       | 7,179 |   | 5,458 |   |
| Sales to  distributors:                   |       |                             |       |   |   |   |   |
| Volume (GWh)                              |       | 364                              |       | 621 |   | 313 |   |
| Average rate  (R$/MWh)                    |       | 68.68                            |       | 51.53 |   | 67.09 |   |
| Total revenues  (millions of R$)(1)       |       | 25                               |       | 32 |   | 21 |   |
| **Electricity  Purchases from Itaipu:**   |       |                             |       |   |   |   |   |
| Volume (GWh)                              |       | 11,936                           |       | 12,220 |   | 12,735 |   |
| Average cost  (R$/MWh)                    |       | 95.93                            |       | 96.15 |   | 76.87 |   |
| Total cost  (millions of R$)              |       | 1,145                            |       | 1,175 |   | 979 |   |

 

----

(1)                     Does notinclude R$12 million, R$24 million and R$140 million relating to energytransactions on the CCEE during 2004, 2003 and 2002, respectively.

 

**Rates**

 

Our results ofoperations in the past have been significantly affected by fluctuations in thelevels of rates that we are permitted to charge for the generation anddistribution of electricity.  Therate-setting process in Brazil has historically been influenced by governmentattempts to control inflation.  With therestructuring of the electric power sector in Brazil that commenced in 1995 andunder the terms of the renewal of the concession agreement that we signed withANEEL in 1997, the process by which rates are set has changed to a significantdegree.  Electricity that we distributeto captive customers (those customers with no alternative means of energysupply, including residential, commercial and most industrial customers) isprovided at rates that are adjusted and revised by ANEEL in accordance with theprovisions of our concession contract. We have entered into electricity supply contracts at freely negotiatedrates with our Free Consumers (those customers that have a demand of 3 MW ormore of electricity at voltage levels of 69 kV or more) that elected not to besubject to ANEEL’s rate-setting structure. Under Law No. 10,848, distribution companies are no longer allowedto enter in new contracts for sale of electricity to Free Consumers atnon-regulated prices.  See “The BrazilianPower Industry—Rates for the Use of the Distribution and Transmission Systems”in Annex A.

 

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

 

ANEEL, through Resolution No. 71, dated as of April 4, 2005,established our first periodic rate revision, allowing for recovery ofoperating costs and an appropriate return on investments.

 

The average rate adjustment applied to our rates on April 8, 2003as part of our periodic rate review was 31.53%. However, according to Resolution No. 71, such rate adjustment wasentitled to be 44.41%.  ANEEL has

 

57

----

 

indicated thatthe rate adjustments expected for the years from 2004 to 2007 will be adjustedin order to recover the differences between the 44.41% rate adjustment we wereentitled to and the 31.53% rate adjustment that was authorized.  From more information see “Item 8.  Financial Information—LegalProceedings—Regulatory Matters.”

 

The difference between the revenue under the 31.53% rate adjustment andthe revenue that would have been earned based on the 44.41% rate adjustment wasrecorded by CEMIG as a deferred regulatory asset of R$1,013 million, includingmonetary variation and accrued interest at a rate of 11.3%, to be recoveredthrough the annual readjustments until 2007. See Note 4 to our consolidated financial statements.

 

ANEEL issued Resolution No. 87 on April 6, 2005, whichestablished our average annual rate adjustment of 23.88%. The components ofthis increase are (i) 6.68% due to the Rate Adjustment Index (*Índice de Reajuste Tarifário*), or IRT; (ii) 5.72% dueto deferred regulatory asset; (iii) 7.35% due to intra-annual variation offixed costs, or CVA; (iv) 2.46% 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 and (v) 1.67% dueto 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.

 

**Power Rationing and Government Measures toCompensate Electric Utilities**

 

Low amounts of rainfall in 2000 and early2001, vigorous growth in demand for energy and Brazil’s significant dependenceon electricity generated from hydrological resources resulted in abnormally lowwater levels in many reservoirs that are used to power Brazil’s majorhydroelectric generation facilities.  In May 2001,the Federal Government announced several measures in response to theseconditions.  First, the President ofBrazil passed Provisional Measure No. 2,147 on May 15, 2001 (asupdated by Provisional Measure No. 2,152-2 on June 1, 2001),creating the *Câmara de Gestão da Crise deEnergia Elétrica*, or Energy Crisis Committee.  The Energy Crisis Committee resolved on May 16,2001 to require certain electricity distributors, including us, to suspenddistribution of electricity to new customers (except residential and ruralcustomers) and for certain non-essential purposes such as nighttime sportingevents and advertising use, and to reduce distribution for the illumination ofpublic areas by 35%.  Second, thePresident passed Decree No. 3,818, on May 15, 2001, requiring theFederal Government to reduce its electricity consumption by 35% beginning July 1,2001.  Third, on May 18, 2001, theFederal Government announced additional power rationing measures to be imposedon industrial, commercial and residential customers in the most industrializedand heavily populated areas of Brazil beginning on June 1, 2001.  These measures required most residentialconsumers to reduce their electricity consumption by 20% of the averageconsumption in May, 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 providedthat bonuses would be paid to residential consumers whose energy consumptionwas lower than the requisite target and that power cuts and surcharges would beimposed on consumers whose energy consumption exceeded the requisitetarget.  ANEEL established specificaccounts and controls to record the effect of the rationing measures relatingto the bonus, surcharge and other related costs.  The power rationing measures ultimatelyceased on February 28, 2002.

 

On October 17, 2001, the FederalGovernment, through Provisional Measure No. 4, approved by Law No. 10,310of November 22, 2001, stated that electric utilities, including us, wouldbe reimbursed for expenses associated with payment of bonuses to consumers andother related costs that exceeded the aforementioned surcharges.  In 2002, we received approximately R$132 millionas reimbursement for a portion of the expenses we incurred in connection withpayment of bonuses to consumers.  Inaddition, we are currently negotiating with ANEEL our reimbursement ofapproximately R$23 million relating to surcharges that were not paid by certaincustomers because their surcharges are under dispute.  There is no assurance that ANEEL willreimburse us, and therefore the total estimated exposure to the Company forthis matter is fully reserved.  Inaccordance with ANEEL Resolution No. 600, dated October 31, 2002, wehave been reimbursed for operating costs of approximately R$28 million thatrelate to the adoption of the Electricity Rationing Plan and that exceedamounts received from surcharges on consumer rates.  Reimbursement of these operating costs wasmade through rate increases in force since April 8, 2003, April 8,2004 and April 8, 2005.

 

On December 12, 2001, throughProvisional Measure No. 14, approved on April 26, 2002 by Law No. 10,438,the Federal Government authorized the creation of the General Agreement of theElectricity Sector.  The GeneralAgreement of the Electricity Sector provides that electric power distributionand generation companies in

 

58

----

 

Brazil, such as us, will be compensated for revenue losses caused bythe reduction in amounts of energy sold and the purchase of energy on the CCEE,as applicable, due to the Federal Government-mandated rationing measures.  Compensation is made by means of anextraordinary increase in the energy rate applicable to future power sales andcompanies are entitled to use this increased rate for an average period of 72months, beginning January 2002.  SeeNote 4 to our consolidated financial statements.

 

**Impact of Our Account Receivable from theState Government**

 

Our liquidity, as well as net income, isaffected by payments made in connection with the CRC Account, the accountreceivable we have from the State Government. The State Government did not make any payments to us under the CRCAccount Agreement in 2001 or 2002.  In2003 and 2004, we offset a portion of these overdue amounts against payments ofinterest on capital that we are required to make to the State Government as ourshareholder.  In order to address thesettlement of these outstanding amounts, we signed three amendments to the CRCAccount Agreement with State Government, each of which is described below.

 

The First Amendment to the CRC AccountAgreement was signed on January 24, 2001 and its purpose was to change themonetary restatement index from UFIR (Tax Reference Unit Index) to IGPD-DI (*Índice Geral de Preços* – “General Market Price Index”),since the UFIR was extinguished in October 2000.

 

The Second Amendment to the CRC AccountAgreement, signed on October 14, 2002, refers to 149 monthly installmentpayments, with maturities from January 1, 2003 through May 1, 2015,representing the total amount of R$1,845 million at December 31, 2004,bearing interest at 6% per year, with restatement based on IGP-DI.  We entered into this Second Amendment withthe State Government in order to preserve the terms and conditions of theoriginal CRC Account Agreement with respect to the above-referencedinstallments.  We did not receive anyscheduled payments from the State Government in respect of this SecondAmendment.  We recorded a full provisionfor loss for this asset as of December 31, 2001.  See Note 3 to our consolidated financialstatements.

 

The Third Amendment to the CRC AccountAgreement, signed on October 24, 2002, refers to outstanding installmentsoriginally due under the CRC Account Agreement from April 1, 1999 through December 31,1999 and from March 1, 2000 through December 1, 2002.  These installments, which totaled R$1,097million as of December 31, 2004, bear interest at an annual rate of 12%,with restatement based on IGP-DI.  We didnot receive any scheduled payments in respect of this Third Amendment in2002.  In 2003 and 2004, we offset aportion of overdue amounts in the value of R$28 million and R$49 million, respectively,against payments of interest on capital that we are required to make to theState Government as our shareholder. We are permitted toretain payments of dividends and interest on capital due to the StateGovernment as our shareholder as a set-off against amounts that the StateGovernment owes us under this Third Amendment. For this reason, we have not recorded a loss provision in respect ofamounts due thereunder.  See Note 3 toour consolidated financial statements.

 

On November 19, 2004 our Board of Directors unanimously approvedthe main terms of a Fourth Amendment to the CRC Account Agreement.  If we execute this amendment with the StateGovernment, we will be entitled to retain 50% of the payments of dividends andinterest on capital due to the State Government, as our shareholder, and to setoff such amounts against amounts that the State Government owes us under theCRC Account Agreement.  Under the termsapproved by our Board of Directors, the outstanding amount will bear interestat an annual rate of 10%, with restatement based on the IGP-DI.  The execution of the Fourth Amendment dependson the prior approval by our shareholders, ANEEL and the legislative assemblyof the State of Minas Gerais. See“Item 10. Additional Information—Material Contracts—CRC Account Agreement.”

 

**Exchange Rates**

 

Substantially all of our revenues andoperating expenses are denominated in *reais*.  Although our electricity purchases fromItaipu are denominated in U.S. dollars, the related foreign exchange risk is nolonger reflected in our operating revenues and operating expenses due to ratelegislation changes in 2001 which allow electricity utilities such as us torecord exchange rate losses related to Itaipu purchases as deferred regulatoryassets.  However, we have significantlevels of foreign currency-denominated debt and other liabilities.  As a result, in reporting periods when the *real* declines against the dollar or otherforeign currencies in which our debt is denominated, our operating

 

59

----

 

results and financial position are adversely affected.  Foreign exchange gain or loss and monetaryvariation gain or loss may significantly impact our results of operations inperiods in which there are wide swings in the value of the *real* relative to the dollar or highinflation.  We have a number of financialand other contracts under which we owe, or are entitled to, amounts in respectof monetary variation as measured by an index of price inflation inBrazil.  In 2004, we have used financialinstruments such as interest rate swaps in order to reduce the risk fromexchange rate fluctuations.  As of December 31,2004, we had entered into swap agreements in the notional amount of US$88.2million and, with respect to the Japanese yen, in the amount of ¥6,937 million(equivalent to US$67.8 million), in order to change the original interest rateof certain financing from an interest rate calculated based on the U.S. dollarand Japanese yen variations to an interest rate calculated based on the *Certificado de Depósito Interbancário*—CDI(Interbank Certificates of Deposit) rate. See Notes 2(d), 14, 21, 23 and 24 to our consolidated financialstatements.

 

**Unbundling**

 

We undertook a reorganization of ourcorporate structure to comply with Law 10,848/04, which establishes that adistribution company may not exercise other activities such as the generationand transmission of electric energy.  Twowholly-owned subsidiaries were created, CemigGeneration and Transmisssion****and Cemig Distribution, which will carryout the activities of electricity generation and transmission, and distributionrespectively.  This process will befinalized with the signature of amendments to the existing concessioncontracts, after convocation by ANEEL.

 

*Financial Reportingand Tax Considerations*

 

We do not believe that the unbundling willresult 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 would be consolidated with ours. We also do not believe that our marginal tax rate, on a consolidatedbasis, will change as a result of the unbundling.  We do, however, anticipate that our operatingresults will be adversely affected as a consequence of the application ofcertain Brazilian revenue taxes.  Therevenue taxes which would cause the adverse effect on operating resultscomprise the *Contribuição para SeguridadeSocial* (a federal social security contribution), or COFINS, and the *Programa de Formação do Patrimônio do Servidor*(a fund for the benefit of public employees), or PASEP, and were assessedagainst our consolidated revenues at a combined rate of approximately 4.65%from December 2002 to December 2003 and 3.65% from January throughNovember 2002.  Since February 2004,the combined tax rate for these contributions is 9.25% of a tax base equal tothe gross revenue less certain deductions. Following the unbundling, we anticipate that the revenue taxes would beassessed at the subsidiary level with respect to revenues of the generationsubsidiary and, separately, revenues of the distribution subsidiary.

 

**Year Ended December 31, 2004 Compared toYear Ended December 31, 2003**

 

*Net operating revenues*

 

Net operating revenues increased 26.9% toR$7,654 million in 2004 from R$6,032 million in 2003 due primarily to higherelectricity sales to final customers.

 

60

----

 
| ** **                                            | ** ** | **2004** | ** ** | **% of net operating revenues** | ** ** | **2003** | ** ** | **% of net operating revenues** | ** ** | **2004 versus  2003 - %** | ** ** |
|-------------------------------------------------------|------------|----------|------------|---------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------|------------|
| Electricity  sales to final customers                 |       | 8,561    |       | 111.8                           |       | 7,179    |       | 119.0                           |       | 19.3                      |       |
| Regulatory  extraordinary rate adjustment             |       | 89       |       | 1.2                             |       | 63       |       | 1.0                             |       | 41.3                      |       |
| Deferred  rate adjustment                             |       | 640      |       | 8.3                             |       | 199      |       | 3.3                             |       | 221.6                     |       |
| Electricity  sales to the interconnected power system |       | 36       |       | 0.5                             |       | 56       |       | 0.9                             |       | (35.7                     | )          |
| Use  of basic transmission network                    |       | 245      |       | 3.2                             |       | 257      |       | 4.3                             |       | (4.7                      | )          |
| Other  operating revenues                             |       | 536      |       | 7.0                             |       | 468      |       | 7.8                             |       | 14.5                      |       |
| Tax  on revenues                                      |       | (2,453   | )          | (32.0                           | )          | (2,190   | )          | (36.3                           | )          | 12.0                      |       |
| Total  net operating revenues                         |       | 7,654    |       | 100.00                          |       | 6,032    |       | 100.00                          |       | 26.9                      |       |

 

The increase in revenues from electricity sales tofinal customers is primarily due to increases in the average rate and in thevolume of electricity sales to final customers. There was a 14.8% increase in the average energy rate in 2004 toR$226.21 per MWh compared to R$197.12 per MWh in 2003 as a result of rateincreases of 31.5% in April 2003 (full effect in 2004) and 14.0% in April 2004.  In addition, there was a 4.1% increase in thevolume of our electricity sales to final customers.  In 2004, we recorded R$89 million in revenuerelating to the regulatory extraordinary rate adjustment, a 41.3% increasecompared to the R$63 million that we recorded in 2003.  We recorded revenue relating to theregulatory extraordinary rate adjustment in accordance with the terms of theGeneral Agreement of the Electricity Sector, which provides for reimbursementof revenue losses incurred during the period of the Electricity Rationing Planand related spot market transactions through special rate increases to bebilled to final customers, and in accordance with consensus described in EITFIssue No. 92-07, “Accounting by Rate-Regulated Utilities for the Effectsof Certain Alternative Revenue Programs,” which establishes a 24-month limitfor the recovery of revenue losses incurred during the Energy RationingPlan.  See Note 4 to our consolidatedfinancial statements.

 

Revenues related to the deferredrate adjustment were R$640 and R$199 million in 2004 and 2003,respectively.  The ANEEL Resolution No. 71,dated April 4, 2004, disclosed the results of CEMIG’s periodic ratereview.  According to this resolution,the rate adjustment that would have to be applied on CEMIG’s rates starting April 8,2003 was 44.4%, instead of the 31.5% applied. The difference will be included by ANEEL in future rate adjustments. SeeNote 4 to our consolidated financial statements.

 

Electricity sales to the interconnected power systemwere R$36 million in 2004, a 35.7% decrease compared to R$56 million in2003.  This decrease resulted primarilyfrom lower sales of energy on the spot market in 2004.

 

Other operating revenues increased 14.5% to R$536 millionin 2004 from R$468 million in 2003.  Thevariation in our other operating revenues in 2004 is mainly due to R$53 millionincrease in revenues from Gasmig, our subsidiary.  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.  See Note 10 and 19 to our consolidatedfinancial statements

 

Taxes on revenues increased 12.0% to R$2,453 millionin 2004 from R$2,190 million in 2003 as a result of the increase in ourelectricity sales to final customers in 2004 as compared to 2003 and as aresult of the VAT billed to customers in connection with the extraordinary rateadjustment.  Taxes on revenues consistof:  (i) VAT, assessed at an averagerate of 21% on electricity sales to final customers, and VAT billed tocustomers 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 Capacidade Emergencial*(Emergency Capacity Charge), a charge established in 2002 that is 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.  See Notes4 and 19 to our consolidated financial statements.

 

61

----

 

*Operatingcosts and expenses*

 

Operating costsand expenses increased 17.7% to R$5,536 million in 2004 from R$4,703 million in2003, principally as a result of an increase in 2004 of regulatory charges, useof basic transmission network, electricity purchased for resale and higherpersonnel costs.

 
| ** **                                                   | ** ** | **2004** | ** ** | **% of net operating revenues** | ** ** | **2003** | ** ** | **% of net operating revenues** | ** ** | **2004 versus  2003 - %** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|---------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------|------------|
| Electricity  purchased for resale                            |       | (1,477   | )          | (19.3                           | )          | (1,396   | )          | (23.1                           | )          | 5.8                       |       |
| Natural gas  purchased for resale                            |       | (268     | )          | (3.5                            | )          | (246     | )          | (4.1                            | )          | 8.9                       |       |
| Use of basic  transmission network                           |       | (586     | )          | (7.7                            | )          | (310     | )          | (5.1                            | )          | 89.0                      |       |
| Depreciation and  amortization                               |       | (677     | )          | (8.8                            | )          | (686     | )          | (11.4                           | )          | (1.3                      | )          |
| Personnel                                                    |       | (788     | )          | (10.3                           | )          | (710     | )          | (11.8                           | )          | 11.0                      |       |
| Regulatory  charges                                          |       | (861     | )          | (11.2                           | )          | (585     | )          | (9.7                            | )          | 47.2                      |       |
| Third-party  services                                        |       | (329     | )          | (4.3                            | )          | (325     | )          | (5.4                            | )          | 1.2                       |       |
| Employee  post-retirement benefits                           |       | (153     | )          | (2.0                            | )          | (109     | )          | (1.8                            | )          | 40.4                      |       |
| Materials and  supplies                                      |       | (83      | )          | (1.1                            | )          | (88      | )          | (1.5                            | )          | (5.7                      | )          |
| Gain on Gasmig  Sale                                         |       | 102      |       | 1.3                             |       | —   |       | —                          |       | —                    |       |
| Other                                                        |       | (407     | )          | (5.3                            | )          | (422     | )          | (7.0                            | )          | (3.6                      | )          |
| Reversal  (Provision) for loss on deferred regulatory assets |       | (9       | )          | (0.1                            | )          | 174      |       | 2.9                             |       | —                    |       |
| Total operating  costs and expenses                          |       | (5,536   | )          | (72.3                           | )          | (4,703   | )          | (78.0                           | )          | 17.7                      |       |

 

Electricity purchased forresale consists primarily of purchases from Itaipu through *Centrais Elétricas Brasileiras S.A. - Eletrobrás*.  We are required under applicable regulationsto purchase 17.0% of Itaipu’s capacity at U.S. dollar-denominated prices.  We also purchase electricity from the CCEEand Furnas.  Electricity purchased forresale increased 5.8% to R$1,477 million in 2004 from R$1,396 million in 2003due primarily to the system services charges recorded in 2004, in the amount ofR$95 million, that are fixed costs which were passed through our rates.  See Note 20 to our consolidated financialstatements.

 

Natural gas purchased forresale increased 8.9% to R$268 million in 2004 compared to R$246 million in2003 and consists of purchases made by our subsidiary, Gasmig.

 

Charges for use of thebasic transmission network mainly correspond to the cost of transportingelectricity in the Brazilian basic transmission network that are prorated amongthe Brazilian distribution companies. Charges for use of the basic transmission network are fixed costs thatrepresented a 89.0% increase to R$586 million in 2004 compared to R$310 millionin 2003 primarily due to increases in the operating costs of new transmissionlines of the Brazilian electric system.

 

Depreciation andamortization expense did not vary significantly, decreasing 1.3% to R$677million in 2004 compared to R$686 million in 2003.

 

Personnel expense increasedto R$788 million in 2004 compared to R$710 million in 2003 primarily as aresult of wage increases of 7.0% and 16.2% in November 2004 and 2003,respectively, and the implementation of our Careers and Remuneration Plan in2004. Additionally, there were provisions related to our Termination ResignationProgram in the amount of R$25 and R$78 million in 2004 and 2003, respectively.

 

Regulatory chargesincreased 47.2% to R$861 million in 2004 from R$585 million in 2003 dueprimarily to the increases of R$120 and R$118 million in the Energy DevelopmentAccount (*Conta de Desenvolvimento Energético*), orCDE, a new charge created to foster energydevelopment in the states and to promote competition regarding energy producedthrough wind farms, small hydroelectric power plants, biomass, natural gas andcoal, and charges for use of water resources, respectively. These expenses arefixed costs.  See Note 4 to ourconsolidated financial statements.

 

62

----

 

Third-party servicesexpense was R$329 million in 2004 compared to R$325 million in 2003.  Third-party services expenses consistsprimarily of contracts related to meter reading, delivery of bills toconsumers, collection services and maintenance of distribution and transmissionlines.

 

Employee post-retirementbenefits increased 40.4% to R$153 million in 2004 compared to R$109 million in2003 due to a higher projected net periodic cost for 2004 as a result of ahigher expected interest expense compared to the expected return on planassets.  See Note 16 to our consolidatedfinancial statements.

 

We recorded a provisionfor losses of R$9 million in 2004 compared to a reversion provision for loss ondeferred regulatory assets of R$174 million in 2003 to reflect our estimation ofthe recoverability of our deferred regulatory assets.  The extraordinary rate adjustment regulatoryasset had an initial maximum recovery period of 82 months, which was reduced to74 months, from January 2002 to February 2008, pursuant to ANEEL’sResolution No. 1 dated January 12, 2004.  We made studies to verify if the 74-monthrecovery period would be sufficient to recover the amounts approved byANEEL.  Based on those studies, werecorded an allowance for losses in the amount of R$13 million as of December 31,2004.  Therefore, there was an additionalallowance, in the amount of R$9 million, since the original amount recorded, asof December 31, 2003, was R$4 million. See Notes 2(q) and 4 to our consolidated financial statements.

 

Other expenses decreased3.6% to R$407 million in 2004 from R$422 million in 2003. The main variationsin other expenses in 2004 compared to 2003 were a decrease of R$25 million inlosses on disposal of fixed assets and a decrease of R$50 million in otherprovisions for contingencies and doubtful accounts, offset by a provision in2004 of R$24 million related to bonuses paid during the rationing period whichwere not reimbursed from the Federal Government, an increase of R$9 million inrental expenses and a increase of R$17 million in employee profit sharing. SeeNote 20 to our consolidated financial statements.

 

*Operatingincome*

 

As a result of theforegoing, we had operating income of R$2,118 million in 2004 compared tooperating income of R$1,329 million in 2003.

 

*Financialincome, net*

 

Financial income, net,includes (i) financial income, which is mainly comprised of interest andmonetary 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) financialexpense, which is mainly comprised of interest expense on loans and financing,the *Contribuição Provisória sobre aMovimentação ou Transmissão de Valores e de Créditos e Direitos de NaturezaFinanceira* (a financial transaction tax), or CPMF, foreign exchangelosses, monetary restatement losses, monetary restatement of deferredregulatory liabilities and other expenses. We had financial income, net of R$350 million in 2004 compared tofinancial income, net of R$674 million in 2003, principally due to a R$242million decrease in foreign exchange revenues resulting from the 8.7%appreciation of the *real* againstthe U.S. dollar in 2004 compared to an 18.2% appreciation of the *real* against the U.S. dollar in 2003.  Additionally, there was a R$122 millionincrease in losses from financial instruments due to the swap operations madein 2004 to reduce our exchange rate risk See Notes 3, 4, 14, 21, 23 and 24 toour consolidated financial statements.

 

*Incometaxes*

 

Income taxes were anexpense of R$731 million on pre-tax income of R$2,468 million in 2004 comparedto expenses of R$607 million on pre-tax income of R$2,003 million in 2003.  Deductions of R$173 million and R$85 millionin 2004 and 2003, respectively, with respect to interest on capital reduced theamount provisioned for income taxes in 2004 and 2003.  See Note 5 to our consolidated financialstatements.

 

*Minorityinterests*

 

We had income fromminority interests of R$2 million in 2004, related to our interest in Gasmig.

 

63

----

 

*Netincome*

 

As a result of theforegoing, we had net income of R$1,739 million in 2004 compared to net incomeof R$1,396 million in 2003.

 

*Othercomprehensive loss*

 

Other comprehensive losswas R$474 million in 2004 compared to other comprehensive loss of R$64 millionin 2003 as a result of the higher additional minimum liability recorded in2004.  In 2004, CEMIG made a change insome actuarial assumptions in the annual discount rate and in the mortalityrate.  The effect of these changes was anincrease in our retirement benefit obligation, which was recorded as an othercomprehensive loss in 2004.

 

*Comprehensiveincome*

 

As a result of thefactors stated above, comprehensive income was R$1,265 million in 2004 comparedto R$1,332 million in 2003.

 

**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

 

*Netoperating revenues*

 

Net operating revenuesincreased 23.8% to R$6,032 million in 2003 from R$4,872 million in 2002 dueprimarily to higher electricity sales to final customers, deferred rateadjustment and use of basic transmission network, partially offset by adecrease in regulatory extraordinary rate adjustment intended to reimburse us forrevenue losses incurred as a result of the Electricity Rationing Plan and adecrease in electricity sales to the interconnected power system.

 
| ** **                                            | ** ** | **2003** | ** ** | **% of net operating revenues** | ** ** | **2002** | ** ** | **% of net operating revenues** | ** ** | **2003 versus  2002 - %** | ** ** |
|-------------------------------------------------------|------------|----------|------------|---------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------|------------|
| Electricity sales  to final customers                 |       | 7,179    |       | 119.0                           |       | 5,458    |       | 112.0                           |       | 31.5                      |       |
| Regulatory  extraordinary rate adjustment             |       | 63       |       | 1.0                             |       | 281      |       | 5.8                             |       | (77.6                     | )          |
| Deferred rate  adjustment                             |       | 199      |       | 3.3                             |       | —   |       | —                          |       | —                    |       |
| Electricity  sales to the interconnected power system |       | 56       |       | 0.9                             |       | 161      |       | 3.3                             |       | (65.2                     | )          |
| Use of basic  transmission network                    |       | 257      |       | 4.3                             |       | 185      |       | 3.8                             |       | 38.9                      |       |
| Other operating  revenues                             |       | 468      |       | 7.8                             |       | 260      |       | 5.3                             |       | 80.0                      |       |
| Tax on revenues                                       |       | (2,190   | )          | (36.3                           | )          | (1,473   | )          | (30.2                           | )          | 48.7                      |       |
| Total net  operating revenues                         |       | 6,032    |       | 100.00                          |       | 4,872    |       | 100.00                          |       | 23.8                      |       |

 

Electricity sales tofinal customers were R$7,179 million in 2003, representing a 31.5% increasecompared to R$5,458 million in 2002. This resulted primarily from an increase in the average rate and anincrease in the volume of electricity sales to final customers.  There was a 30.0% increase in the averageenergy rate in 2003 to R$197.12 per MWh compared to R$151.64 per MWh in 2002 asa result of rate increases of 10.5% in April 2002 (full effect in 2003)and 31.5% in April 2003.  In addition,there was a 0.9% increase in the volume of our electricity sales to finalcustomers.  For 2003 compared to 2002,the volume of electric power sold by us to residential, commercial, rural andother customers increased by 2.7%, 3.6%, 4.6% and 6.3%, respectively, whilesales to industrial customers decreased by 0.9%.

 

In 2003, we recorded R$63million in revenue relating to the regulatory extraordinary rate adjustment, a77.6% decrease compared to the R$281 million that we recorded in 2002.  We recorded revenue relating to theregulatory extraordinary rate adjustment in 2003 and 2002 in accordance withthe terms of the General Agreement of the Electricity Sector, which providesfor reimbursement of revenue losses incurred during the period of the

 

64

----

 

Electricity RationingPlan and related spot market transactions through special rate increases to bebilled to final customers, and in accordance with consensus described inEmerging Issues Task Force Issue No. 92-07, “Accounting by Rate-RegulatedUtilities for the Effects of Certain Alternative Revenue Programs,” whichestablishes a 24-month limit for the recovery of revenue losses incurred duringthe Energy Rationing Plan.  See Note 4 toour consolidated financial statements.

 

In 2003, we recordedR$199 million in revenue relating to the deferred rate adjustment.  ANEEL Resolution No. 71, dated April 4,2004, disclosed the results of CEMIG’s periodic rate review.  According to this resolution, the rate adjustmentthat would have to be applied on CEMIG’s rates starting April 8, 2003 was37.9%, instead of the 31.5% applied.  Thedifference will be included by ANEEL in future rate adjustments.

 

Electricity sales to theinterconnected power system were R$56 million in 2003, a 65.2% decreasecompared to R$161 million in 2002.  Thisdecrease resulted primarily from higher spot market rates associated withenergy transactions on the CCEE in the prior year.

 

Revenues from use of thebasic transmission network by other concessionaires increased 38.9% to R$257million in 2003 from R$185 million in 2002 due to rate increases in July 2002(full effect in 2003) and July 2003.

 

Other operating revenuesincreased 80.0% to R$468 million in 2003 from R$260 million in 2002 due primarilyto an R$167 million increase in revenues from Gasmig, our subsidiary,reflecting 83.5% period-over-period growth, and an increase of R$28 million inrevenue from Empresa de Infovias S.A. as a result of telecommunication servicesrendered in 2003.

 

Taxes on revenuesincreased 48.7% to R$2,190 million in 2003 from R$1,473 million in 2002 as aresult of the 31.5% increase in our electricity sales to final customers in2003 as compared to 2002 and as a result of the VAT billed to customers inconnection with the extraordinary rate adjustment.  Taxes on revenues consist of:  (i) VAT, assessed at an average rate of21% on electricity sales to final customers, and VAT billed to customersrelated to the deferred regulatory assets; (ii) COFINS, assessed at a rateof 3%; (iii) PASEP, assessed at a rate of 1.65%; and (iv) the *Encargo de Capacidade Emergencial*(Emergency Capacity Charge), a charge established in 2002 that is 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.  See Notes4 and 19 to our consolidated financial statements.

 

*Operatingcosts and expenses*

 

Operating costs and expensesincreased 8.2% to R$4,703 million in 2003 from R$4,345 million in 2002,principally as a result of an increase in 2003 of electricity purchased forresale and higher personnel costs, partially offset by a reversion provisionrecognized in 2002 related to loss on deferred regulatory assets.

 

65

----

 
| ** **                                                   | ** ** | **2003** | ** ** | **% of net operating revenues** | ** ** | **2002** | ** ** | **% of net operating revenues** | ** ** | **2003 versus  2002 - %** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|---------------------------------|------------|----------|------------|---------------------------------|------------|---------------------------|------------|
| Electricity  purchased for resale                            |       | (1,396   | )          | (23.1                           | )          | (1,333   | )          | (27.4                           | )          | 4.7                       |       |
| Natural gas  purchased for resale                            |       | (246     | )          | (4.1                            | )          | (152     | )          | (3.1                            | )          | 61.8                      |       |
| Use of basic  transmission network                           |       | (310     | )          | (5.1                            | )          | (298     | )          | (6.1                            | )          | 4.0                       |       |
| Depreciation and  amortization                               |       | (686     | )          | (11.4                           | )          | (666     | )          | (13.7                           | )          | 3.0                       |       |
| Personnel                                                    |       | (710     | )          | (11.8                           | )          | (532     | )          | (10.9                           | )          | 33.5                      |       |
| Regulatory  charges                                          |       | (585     | )          | (9.7                            | )          | (548     | )          | (11.2                           | )          | 6.8                       |       |
| Third-party  services                                        |       | (325     | )          | (5.4                            | )          | (265     | )          | (5.4                            | )          | 22.6                      |       |
| Employee  post-retirement benefits                           |       | (109     | )          | (1.8                            | )          | (207     | )          | (4.3                            | )          | (47.3                     | )          |
| Materials and  supplies                                      |       | (88      | )          | (1.5                            | )          | (78      | )          | (1.6                            | )          | 12.8                      |       |
| Other                                                        |       | (422     | )          | (7.0                            | )          | (238     | )          | (4.9                            | )          | 77.3                      |       |
| Reversal  (Provision) for loss on deferred regulatory assets |       | 174      |       | 2.9                             |       | (28      | )          | (0.6                            | )          | —                    |       |
| Total operating  costs and expenses                          |       | (4,703   | )          | (78.0                           | )          | (4,345   | )          | (89.2                           | )          | 8.2                       |       |

 

Electricity purchased forresale consists primarily of purchases from Itaipu through *Centrais Elétricas Brasileiras S.A. - Eletrobrás*.  We are required under applicable regulationsto purchase 17.0% of Itaipu’s capacity at U.S. dollar-denominated prices.  We also purchase electricity from the CCEE andFurnas.  Electricity purchased for resaleincreased 4.7% to R$1,396 million in 2003 from R$1,333 million in 2002 duemainly to a 20.0% increase in purchases from Itaipu to R$1,175 million in 2003compared to R$979 million in 2002, partially offset by a 73.2% decrease inenergy purchased from the CCEE, considering the higher spot market ratesassociated with energy transactions on the CCEE in the prior year.  See Note 20 to our consolidated financialstatements.

 

Natural gas purchased forresale increased 61.8% to R$246 million in 2003 compared to R$152 million in2002 and consists of purchases made by our subsidiary, Gasmig.  The increase in natural gas purchased forresale is the result of increases in the natural gas price, and a 12.2%increase in the volume of gas sold by Gasmig in 2003.

 

Charges for use of thebasic transmission network mainly correspond to the cost of transportingelectricity purchased from Itaipu and other concessionaires.  Charges for use of the basic transmissionnetwork represented a 4.0% increase to R$310 million in 2003 compared to R$298million in 2002 principally as a result of rate increases in July of 2002and 2003.

 

Depreciation andamortization increased 3.0% to R$686 million in 2003 from R$666 million in 2002as a result primarily of the entry into service of additional distribution andtransmission networks and lines.

 

Personnel expenseincreased to R$710 million in 2003 compared to R$532 million in 2002 primarilyas a result of wage increases of 16.2% and 11.5% in November 2003 and2002, respectively, and a provision relating to our Termination ResignationProgram in the amount of R$78 million.

 

Regulatory chargesincreased 6.8% to R$585 million in 2003 from R$548 million in 2002 dueprimarily to R$118 million related to the CDE, partially offset by a R$63 million decrease in Fuel Usage QuotaAccount charges in 2003 to R$282 million from R$345 million in 2002 as a resultof decreased operations of thermal generation plants in 2003.  See Note 20 to our consolidated financial statements.

 

Third-party servicesexpense increased 22.6% to R$325 million in 2003 compared to R$265 million in2002.  This increase resulted mainly froman increase in the prices for service contracts relating to meter reading, deliveryof bills to consumers and collection services.

 

66

----

 

Employee post-retirementbenefits decreased 47.3% to R$109 million in 2003 compared to R$207 million in2002 due to a lower projected net periodic cost for 2003 as a result of ahigher expected return on plan assets. See Note 16 to our consolidated financial statements.

 

We recorded a reversionprovision for loss on deferred regulatory assets of R$174 million in 2003compared to a provision of R$28 million in 2002 to reflect our estimation ofthe recoverability of our deferred regulatory assets.  The extraordinary rate adjustment regulatoryasset had an initial maximum recovery period of 82 months, which was reduced to74 months, from January 2002 to February 2008, pursuant to ANEEL’sResolution No. 1 dated January 12, 2004.  We made studies to verify if the 74-monthrecovery period would be sufficient to recover the amounts approved byANEEL.  Based on those studies, werecorded an allowance for losses in the amount for R$4 million as of December 31,2003.  Therefore, there was a reversal ofthe allowance, in the amount of R$174 million, since the original amountrecorded, as of December 31, 2002, was R$178 million.  See Notes 2(q) and 4 to our consolidatedfinancial statements.

 

Other expenses increased77.3% to R$422 million in 2003 from R$238 million in 2002 due principally to anincrease of R$55 million in employees profit sharing, considering our betterfinancial performance in 2003, and an increase of R$44 million in provision fordoubtful accounts to R$57 million in 2003 compared to R$13 million in 2002,and, to a lesser extent, to increases in our losses on disposal of fixed assetsand expenses related to other taxes and rentals.  See Note 20 to our consolidated financialstatements.

 

*Operatingincome*

 

As a result of theforegoing, we had operating income of R$1,329 million in 2003 compared tooperating income of R$527 million in 2002.

 

*Financialincome (expense), net*

 

Financial income(expense), net, includes (i) financial income, which is mainly comprisedof interest and monetary restatement of our account receivable from the StateGovernment, investment income earned, late charges on overdue electricitybills, foreign exchange gains, monetary restatement on deferred regulatoryassets, and (ii) financial expense, which is mainly comprised of interestexpense on loans 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 financial revenues, net of R$674million in 2003 compared to financial expenses, net of R$525 million in 2002,principally due to a R$321 million increase in foreign exchange revenues and adecrease of R$800 million in foreign exchange losses, resulting from the 18.2%appreciation of the *real* againstthe U.S. dollar in 2003 compared to an 52.3% devaluation of the *real*against the U.S. dollar in 2002.  Additionally, there was a R$330 millionincrease in monetary restatement on deferred regulatory assets andreclassification adjustment on marketable securities gains of R$76 million fromthe sale of *Notas do Tesouro Nacional*(Brazilian National Treasury Notes) offset by a R$158 million decrease inincome from temporary cash investments due to lower cash and cash equivalentsand restricted investments in 2003 and income from cash investments denominatedin U.S. dollars, losses on financial instruments, net of R$44 million and aR$139 million decrease in interest and monetary restatement of an accountreceivable from the State Government due to lower variation of IGP-DI, index ofthe contract.  See Notes 3, 4, 14, 21, 23and 24 to our consolidated financial statements.

 

*Incometaxes*

 

Income taxes were anexpense of R$607 million on pre-tax income of R$2,003 million in 2003 comparedto expenses of R$26 million on pre-tax income of R$2 million in 2002.  Deductions of R$85 million and R$73 millionin 2003 and 2002, respectively, with respect to interest on capital reduced theamount provisioned for income taxes in 2003. See Note 5 to our consolidated financial statements.

 

67

----

 

*Minorityinterests*

 

Minority interests wereincome of R$12 million in 2002, related to the operation of Empresa de InfoviasS.A.

 

*Netincome (loss)*

 

As a result of theforegoing, we had net income of R$1,396 million in 2003 compared to net loss ofR$12 million in 2002.

 

*Othercomprehensive income (loss)*

 

Other comprehensive losswas R$64 million in 2003 compared to other comprehensive income of R$242million in 2002 as a result of the additional minimum liability recorded andthe reclassification adjustment resulting from the sale of the available forsale securities.

 

*Comprehensiveincome*

 

As a result of thefactors stated above, comprehensive income was R$1,332 million in 2003 comparedto R$230 million in 2002.

 

**Liquidityand Capital Resources**

 

Our business is capitalintensive.  Historically, we haverequired capital to finance the construction of new generation facilities andthe expansion and modernization of existing generation, transmission anddistribution facilities.  Our liquidityrequirements are also affected by our dividend policy.  See “Item 8. Financial Information—Dividend Policy and Payments.”  We have funded our liquidity and capitalrequirements primarily with cash provided by operations and, to a lesserextent, with proceeds of financings.  Webelieve that our current cash reserves, cash provided by operations andanticipated proceeds from financings will be sufficient during the next 12months to meet our liquidity requirements.

 

*Cashand cash equivalents*

 

Cash and cash equivalentsas of December 31, 2004 were R$874 million compared to R$440 million as ofDecember 31, 2003 and R$123 million as of December 31, 2002.  None of our cash or cash equivalents was heldin currencies other than *reais* as of December 31,2004.

 

*Cashflow from operating activities*

 

Net cash provided byoperating activities in 2004, 2003 and 2002 totaled R$1,538 million, R$658million and R$732 million, respectively. The increase in cash provided by operating activities in 2004 comparedto 2003 was due primarily to financial settlement of the CCEE transactions in2003. The same reason justified the decrease in cash provided by operatingactivities in 2003 compared to 2002. Significant non-cash items affecting earnings included increaseddepreciation and amortization expense as a result of our on-going capitalimprovements projects, recognition of deferred regulatory assets, the effectsof monetary variation and exchange rate variations and the provision for losson the receivable under the CRC Account Agreement.

 

*Cashflow from investing activities*

 

Net cash used ininvesting activities during 2004, 2003 and 2002 amounted to R$917 million,R$852 million and R$546 million, respectively, principally relating to theacquisition of property, plant and equipment and the modernization of existinggeneration, transmission and distribution facilities.  Capital expenditures from the acquisition ofproperty, plant and equipment amounted to R$1,061 million, R$1,029 million andR$869 million in 2004, 2003 and 2002, respectively.  New investments in other affiliates alsoimpacted net cash use in investing activities. Such investments amounted to R$10 million, R$4 million and R$103 millionin 2004, 2003 and 2002,

 

68

----

 

respectively.  See “Item 4. Information on theCompany—Capital Expenditures” for more detail regarding how these capitalexpenditures were applied by us.

 

*Cashflow from financing activities*

 

Net cash used infinancing activities during 2004 was R$187 million, comprised of R$1,230million 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- and foreigncurrency-denominated long-term financing and the payment of R$309 million individends and interest on capital.

 

Net cash provided byfinancing activities during 2003 was R$511 million, comprised of R$717 millionand R$820 million in proceeds from long-term financing and short-term loans,respectively, offset by the repayment of R$826 million of real- and foreigncurrency-denominated long-term financing and the payment of R$200 million individends and interest on capital.

 

Net cash used infinancing activities during 2002 was R$281 million, comprised of the repaymentof R$597 million of real- and foreign currency-denominated long-term financingand the payment of R$214 million in dividends and interest on capital, offsetby R$518 million in proceeds from long-term financing, including U.S.dollar-denominated long-term loans, and an advance for future capital increasemade by minority shareholders of R$12 million.

 

Our indebtedness as of December 31,2004 was R$4,167 million, composed of R$2,750 million of long-term debt andR$1,417 million of the current portion of long-term debt.  This compares with indebtedness as of December 31,2003 of R$ 3,991 million, composed of R$2,331 million of long-term debt andR$1,660 million current portion of long-term debt.  Of our long-term debt (including the currentportion) at December 31, 2004, R$1,119 million was denominated in foreigncurrencies (R$857 million of which was U.S. dollar-denominated) and R$3,048million was denominated in *reais*.  Of our total indebtedness of R$4,167 millionas of December 31, 2004, R$3,369 million is subject to variable interestrates.  See Notes 14 and 23 to ourconsolidated financial statements.

 

We are subject tofinancial covenants contained in some of our debt agreements that require us tomaintain certain financial ratios.  Theseratios are computed based on our financial statements prepared in accordancewith accounting practices adopted in Brazil. These and other covenants could limit our ability to support ourliquidity and capital requirements.

 

We are currently not incompliance with certain financial covenants of a debt agreement between Empresade Infovias S.A. and MBK Furukawa Sistemas S.A./Unibanco in the total principalamount of R$58.0 million as of December 31, 2004, of which R$40.8 millionis classified as long-term liabilities in our consolidated financialstatements.  These covenants are based onthe financial statements prepared in accordance with the accounting practicesadopted in Brazil.  However, Empresa deInfovias S.A. has obtained a waiver from the creditors party to the contractfor non-compliance with those covenants. The waiver affirms that such creditors will not exercise their rights todemand either accelerated or immediate payment of the total amount due until December 31,2005.  We cannot assure you that we willbe able to renew this waiver in which case the relevant creditors would be ableto accelerate payment.  This would resultin the cross-acceleration of other indebtedness of CEMIG due to cross-defaultprovisions in its other debt agreements. See Note 14 to our consolidated financial statements and “Item 13.  Defaults, Dividend Arrearages andDelinquencies.”

 

On December 31,2004, our total debt was R$4,167 million, of which R$1,417 million matures in2005.  Of our total debt, R$1,119 millionwas contracted in foreign currency, of which R$342 million matures in2005.  Due to these maturities in 2005,we need funds in the short term to pay and refinance these obligations.  For this reason, we are refinancing our debtin 2005 to lengthen maturities.  We planto raise approximately R$1.5 billion in 2005, which will be used to repaydebt.  We cannot assure you that we willsuccessfully consummate this refinancing.

 

In addition to thefinancings described in our financial statements, we have credit lines withfinancial institutions as of December 31, 2004 in the amount of R$94million which we have not yet used.

 

69

----

 

On July 19, 2004, weset up a Local Note Program, or the Program, according to “Instrução CVM No. 400”,dated December 29, 2003.  The Program is expectedto last two years from the date of the filing with the Comissão de ValoresMobiliários – CVM.  Initially, under theProgram we were permitted to issue debentures in an amount of up to R$1.5billion.  We currently have R$230.4million outstanding under the Program. Because of the unbundling, we cannot issue additional debentures underthe Program.  We may in the futureestablish other local 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 certainsituations.  For example, we must obtainapproval from the Brazilian Ministry of Finance and the Central Bank prior tocertain international financial transactions and such approval is typicallygranted only if the purpose of the transaction is to finance the import ofgoods or to roll over our external debt. In addition, financial institutions in Brazil are subject to risk exposurerestrictions with regard to state governments, governmental agencies andstate-controlled companies such as us. The restrictions mentioned in this paragraph have not prevented us fromobtaining financing, although there is no assurance that our ability to obtainfinancing will not be hindered in the future. See “Item 3.  Key Information—RiskFactors—Risks Relating to Brazil—We currently face limitations on our abilityto obtain financing.”

 

We currently plan to makecapital expenditures aggregating approximately R$1,988 million in 2005.  The principal uses of these expenditures areexpected to be for expansion of our distribution infrastructure and increasesin our generation capacity.  In 2004, wefunded our capital expenditures and met our liquidity requirements through acombination of cash flow from operations and financings.  We expect that we will fund our proposedcapital expenditures and meet our other liquidity requirements in 2005 througha combination of cash flow from operations and financings.  Because we rely primarily on cash generatedfrom operations to fund our liquidity and capital requirements, factors thatcause our revenues and net income to increase or decrease could have acorresponding effect on our access to sources of liquidity.

 

Over the long term, weanticipate that it will be necessary to make significant capital expendituresin connection with the maintenance and upgrading of our generation,transmission and distribution facilities, and we expect to employ a variety ofliquidity sources, such as cash flow from operations and financings, inconnection with such requirements.  See “Item3.  Key Information—Risk Factors” for adiscussion of certain matters that might adversely affect our liquidityposition.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements.

 

**TabularDisclosure of Contractual Obligations**

 

We have 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 asconstruction commitments.  The followingtable provides information, as of December 31, 2004, about our contractualobligations and commitments in millions of *reais*.

 

70

----

 
| ** **                                            | ** ** | **Total** | ** ** | **Less  than 1  year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More  than 5  years** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Total debt(1)                                         |       | 4,167     |       | 1,417                  |       | 1,322          |       | 873            |       | 555                     |       |
| Purchase  obligations                                 |       |      |       |                   |       |           |       |           |       |                    |       |
| Purchase of  electricity from Itaipu for resale(2)    |       | 8,619     |       | 1,024                  |       | 2,048          |       | 2,048          |       | 3,499                   |       |
| Energy auction  on CCEE                               |       | 6,478     |       | 267                    |       | 1,618          |       | 1,621          |       | 2,972                   |       |
| Transfer and  transport electric power from Itaipu(2) |       | 505       |       | 60                     |       | 120            |       | 120            |       | 205                     |       |
| Investments                                           |       |      |       |                   |       |           |       |           |       |                    |       |
| Aimorés hydroelectric  power plant(3)            |       | 66        |       | 66                     |       | —         |       | —         |       | —                  |       |
| Irapé  hydroelectric power plant(3)              |       | 287       |       | 271                    |       | 16             |       | —         |       | —                  |       |
| Funil  hydroelectric power plant(3)                   |       | 11        |       | 11                     |       | —         |       | —         |       | —                  |       |
| Queimado  hydroelectric power plant(3)                |       | 20        |       | 20                     |       | —         |       | —         |       | —                  |       |
| Pai Joaquim  hydroelectric power plant(3)             |       | 10        |       | 10                     |       | —         |       | —         |       | —                  |       |
| Cemig Capim  Branco Energia(3)                        |       | 39        |       | 22                     |       | 17             |       | —         |       |                    |       |
| Transmission  Lines(3)                                |       | 46        |       | 35                     |       | 11             |       | —         |       | —                  |       |
| Gasmig                                                |       | 75        |       | 5                      |       | 64             |       | 6              |       | —                  |       |
| Empresa de  Infovias S.A.                             |       | 48        |       | 48                     |       | —         |       | —         |       | —                  |       |
|                                                  |       |      |       |                   |       |           |       |           |       |                    |       |
| Other long-term  obligations                          |       |      |       |                   |       |           |       |           |       |                    |       |
| Pension plan  contributions                           |       | 1,555     |       | 112                    |       | 237            |       | 186            |       | 1,020                   |       |
|                                                  |       |      |       |                   |       |           |       |           |       |                    |       |
| Total                                                 |       | 21,926    |       | 3,368                  |       | 5,453          |       | 4,854          |       | 8,251                   |       |

 

----

(1)     Inthe event of our non-compliance with certain covenants in our loan agreements,the total principal, future interest and any penalties due under theseagreements may become immediately due and payable.

(2)     Contractwith Furnas, denominated in U.S. dollars, to supply electric power purchasedfrom Itaipu until May 2013.  Amountsare calculated based on the U.S. dollar exchange rate as of December 31,2004.

(3)     Contractualobligations with contractors.

 

**Researchand Development**

 

We are engaged in projects that explore technologicaladvances not only in electric power systems but in all energy-related fieldssuch as the development of the usage of alternative energy sources,environmental control and power system performance and safetyoptimization.  In 2004, we spentapproximately R$28 million on research and development, including transfers to *Fundo Nacional de Desenvolvimento Cientifico eTecnológico*—FNDCT (a federal research and development fund).  During the years ended December 31,2004, 2003 and 2002, we spent an aggregate of approximately R$38 million onresearch and development, and we transferred the same amount to FNDCT duringthat time.  We expect to spend a total ofapproximately R$30 million on research and development in 2005.  We conduct these efforts in accordance withFederal Law No. 9,991, which requires Brazilian power utilities to spendat least 0.5% of their net income on research and development projects(including transfers to FNDCT), as well as in accordance with our strategiccorporate plans.

 

We have dedicated a substantial portion of ourresearch and development activities to the development of the usage ofalternative energy sources, including wind, solar and biomass powergeneration.  For example, ourexperimental Morro do Camelinho wind farm, with an installed capacity of 1 MW,began operating in 1994.  See “Item4.  Information on the Company—Generationand Purchase of Electric Power—Wind Farm.” We are currently involved in alternative energy research and developmentthrough 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);

 

71

----

 

•                                          the use oflow cost technologies for electricity generation such as Elsbeth and Stirlingmotors, internal combustion engines, photovoltaic panels, micro turbines, hightemperature fuel cells, biomass gasification, and bio-gas from animal 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 and distributionsystems, like the development of new computer tools, equipment and materials;

 

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

 

•                                          projectsfor the optimization of supervision, control and protection systems of the transmissionand distribution control centers.

 

We have also been instrumental in developing programsrelating to the generation of electricity in remote areas and for low-incomeconsumers, such as our Lumiar and Luz Solar programs.

 

**Trends**

 

Including the purchase of energy from the Itaipu powerplant, in 2004 our generation resources were sufficient to meet our own loadand our sale contracts.  Due to the goodrainfall, reservoir and river conditions in 2004, the Brazilian water grid as awhole generated 96% of its maximum contracting capacity.

 

In 2004, since it wasstill possible to continue Initial Contracts, almost all of our generation wasused to supply our own needs.  For 2005,only 25% of the Initial Contracts remain and, other than under these contracts,self-supply is no longer permitted. Thus, to complement our needs, we bought energy from several generatingcompanies through the “Existing Energy” Auction held on December 7,2004.  At that auction we alsoparticipated as vendors and sold energy to 35 distribution companies.

 

As a public serviceutility, we are subject to regulations issued by the Federal Government asdescribed in “Item 4.  Information on theCompany—Brazil’s Energy Market—Regulation.” Therefore, any change in the

 

72

----

 

regulatory framework mayaffect us significantly either with respect to our revenue if the changerelates to prices or with respect to our operating expenses if the changerelates to costs incurred to provide service to customers.

 

We do not anticipate anysignificant change in revenues in respect of the transmission and distributionbusinesses since the regulation in place meets the plans of the FederalGovernment administration.

 

The rate readjustment wasapplied differently to different client categories with industrial clientshaving higher readjustments than residential clients.  For more information, see “Item 4.  Information on the Company—Brazil’s EnergyMarket—Rates” and “Annex A—The Brazilian Power Industry—Rates for the Use ofthe Distribution and Transmission Systems”. This difference in application may have an impact on sales volume growthin the future since industrial clients will tend to develop power projects tosupply energy to themselves at a lower cost. We are taking steps to mitigate this impact through the connection ofnew clients of different categories as well as clients based in neighboringstates.  In the coming years, we expectelectricity consumption to grow toward the pre-rationing level based on anassumption that economic activity in Brazil will return to the levels itreached prior to the Federal Government-imposed rationing in 2001.  However, there can be no assurance that thiswill occur.

 

We expect that expensesthat we are not able to control will increase at a rate well above inflation,which will require further rate increases. We expect our controllable costs to rise more or less at the rate ofinflation since most of these cost items are adjusted for inflation accordingto contractual terms.  We have takenmeasures to cut operating costs so as to meet benchmarks proposed by ANEEL inthe periodic rate review process.

 

With respect toexpansion, the most significant trend relates to universalization of clientservice.  Utilities are currentlyrequired to provide service to all clients according to a schedule settledby ANEEL.  The legislation provides 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 to a program launched by ANEEL foruniversalization of electric services in rural areas, initially 29.5% of thenecessary funds will come from CDE and 25.1% from RGR.  With respect to energy supply, we expect thecurrent overcapacity and favorable reservoir levels to prevail in the nearterm, allowing customers to consume electricity at lower prices anddiscouraging investment in new power projects. Investment in new generating capacity is one of the major concerns ofthe Federal Government to be addressed through regulatory frameworkreform.  It is expected that the newregulatory framework will encourage investment in new generation capacity.

 

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

# ** **

**Directorsand Senior Management**

 

We are managed by ourBoard 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 sevenexecutive officers.  As our majorityshareholder, the State Government has the right to elect the majority of ourBoard of Directors and, therefore, can control the outcome of Board of Directormeetings.  Each holder of our commonshares is entitled to vote to elect members of our Board of Directors.  Pursuant to the Brazilian Corporate Law, anyshareholder holding at least 10% of our outstanding common shares may requestthat a cumulative voting procedure be adopted that would entitle each share toa number of votes equal to the current number of members of our Board ofDirectors and giving each shareholder the right to either vote cumulatively fora candidate or to distribute its votes among several candidates.

 

Pursuant to the BrazilianCorporate Law, holders of preferred shares representing at least 10% of ourshare capital or holders of common shares representing at least 15% of ourvoting capital (other than our controlling shareholder) have the right to appointone member and an alternate to the Board of Directors.  If none of the holders of common shares orpreferred shares meets the respective thresholds described above, shareholdersrepresenting in the aggregate at least 10% of our share capital will be able tocombine their holdings to appoint one member and an alternate to the Board ofDirectors.

 

73

----

 

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

 

**Board ofDirectors**

 

Our Board of Directorsordinarily meets once every two months. Its responsibilities include the establishment of corporate strategy,the general direction of our business and the election, dismissal andsupervision of our executive officers.

 

Each regular member ofthe Board of Directors has an alternate member, who is elected at generalshareholder meetings in the same manner as a regular member.  Alternate directors act as substitutes fortheir respective directors from time to time when the directors are notavailable to perform normal director functions, or, in the case of a vacancy onthe Board of Directors, until a replacement director is appointed to fill suchvacancy.  No member or alternate memberof our 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.  Our full Board of Directors is elected everythree 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.  The terms of the current members of our Boardof Directors expire in April 2006.

 

The names, positions anddates of initial appointment of our directors and their respective alternatesare as follows:

 
| **Name**                                   | ** ** | **Position** | ** ** | **Date of Initial  Appointment** | ** ** |
|--------------------------------------------|------------|--------------|------------|----------------------------------|------------|
| Wilson Nélio Brumer(1)                |       | Director     |       | February 27, 2003           |       |
| Fernando Lage de Melo                      |       | Alternate    |       | February 27, 2003           |       |
| Djalma Bastos de Morais                    |       | Director     |       | January 14, 1999            |       |
| Luiz Antônio Athayde Vasconcelos      |       | Alternate    |       | February 27, 2003           |       |
| Francelino Pereira dos Santos              |       | Director     |       | February 27, 2003           |       |
| Marco Antônio Rodgrigues da Cunha     |       | Alternate    |       | February 27, 2003           |       |
| Antônio Adriano Silva                 |       | Director     |       | January 14, 1999            |       |
| Francisco Sales Dias Horta                 |       | Alternate    |       | February 27, 2003           |       |
| Nilo Barroso Neto                          |       | Director     |       | November 24, 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                |       |
| Fernando Teixeira Mendes Filho(2)          |       | Alternate    |       | May 07, 2004                |       |
| Andréa Paula Fernandes(2)             |       | Director     |       | May 07, 2004                |       |
| Rodrigo Bhering  Andrade (2)               |       | Alternate    |       | December 30, 2004           |       |
| Antônio Luiz Barros de Salles(2)      |       | Director     |       | May 07, 2004                |       |
| Andréa Leandro Silva(2)               |       | Alternate    |       | May 07, 2004                |       |
| José Augusto Pimentel Pessoa(2)       |       | Director     |       | May 07, 2004                |       |
| Evandro Veiga Negrão de Lima(2)       |       | Alternate    |       | December 30, 2004           |       |
| Aécio Ferreira da Cunha               |       | Director     |       | May 28, 2003                |       |
| Eduardo Lery Vieira                        |       | Alternate    |       | May 28, 2003                |       |
| Maria Estela Kubitschek Lopes              |       | Director     |       | February 27, 2003           |       |
| Luiz Henrique de Castro Carvalho           |       | Alternate    |       | August 20, 2004             |       |
| Alexandre Heringer Lisboa                  |       | Director     |       | February 27, 2003           |       |
| Franklin Moreira Gonçalves            |       | Alternate    |       | February 27, 2003           |       |
| José Luiz Alquéres(3)            |       | Director     |       | December 30, 2004           |       |
| Guy Maria Villela Paschoal(3)              |       | Alternate    |       | December 30, 2004           |       |

 

----

(1)     Chairmanof the Board of Directors.

(2)     Electedby Southern.

 

74

----

 

(3)     Electedby our preferred shareholders.

 

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

 

*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 has been the Minas Gerais State Secretaryof Economic Development since January 2003 and a director of Valepar S.A.since January 2001.  He is theformer chairman of the following companies: BHP Billiton Brasil from November 1998 to December 2002; GrupoParanapanema from February 1996 to October 1998; Aço Minas Gerais —Açominas from May 1995 to June 1997; Eletrometal Metais EspeciaisS.A. from 1994 to 1996; Brasifco S.A. from 1993 to 1996; Rio Doce FinanceLtd.—RDF from 1990 to 1992; Itabira International Company Ltd. — ITACO from1990 to 1992 and Navegação Rio Doce S.A.—DOCENAVE from 1990 to 1991.  Mr. Brumer is a former vice president ofthe board of directors of the following companies:  Acesita from November 1992 to October 1998;Acesita Energética S.A. from 1992 to 1996; Forjas Acesita S.A. from 1992 to1996; CVRD from 1990 to 1992 and the Villares Group consisting of IndústriasVillares, Aços Villares S.A. and Elevadores Atlas S.A. from February 1995to October 1998.  He is a formerdirector of:  Companhia Siderúrgica deTubarão—CST from July 1996 to April 1999; Varig from November 1994to February 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 to1986.  Mr. Brumer is also the formerchief executive officer of:  Acesita fromNovember 1992 to October 1998; Companhia Siderúrgica de Tubarão from July 1996to April 1999; CVRD from April 1990 to November 1992, AcesitaEnergética S.A. from 1992 to 1993 and Forjas Acesita S.A. from 1992 to1993.  He served as the chief financialofficer of CVRD from February 1988 to April 1990.  Mr. Brumer has also served as a memberof the fiscal councils of:  Navegação RioDoce S.A. – DOCENAVE from 1983 to 1987 (president); Urucum Mineração S.A. from1983 to 1984 and Fundação Vale do Rio Doce de Seguridade Social—VALIA from 1982to 1983.  Mr. Brumer has also servedas the president of the Brazilian Steel Company Institute from August 1997to May 1999, president of the Industrial Policy Council of the IndustryFederation of Minas Gerais from 1994 to 1999, president of the financecommittee of Valesul Alumínio S.A. from 1984 to 1988, executive director of theBrazilian Foreign Trade Association – AEB from 1994 to 1997, and a member ofseveral councils and committees.

 

*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 hehas been our Chief Executive Officer, and since July 2002 he has been theChief Executive Officer of Empresa de Infovias S.A.  From January 1999 to December 2004he was the Chief Executive Officer of Gasmig. From May 1999 to August 2001 he was the Chief ExecutiveOfficer of Empresa de Infovias S.A.  From1995 to 1998, he was Vice-President of Petrobrás Distribuidora S.A., theBrazilian oil company.  From 1993 to1994, Mr. Morais served as Brazilian Minister of Communications.  He has also held various other positions,such as chief executive officer of Telecomunicações de Minas GeraisS.A.—Telemig; manager of Telecomunicações Brasileiras S.A.—Telebrás; chiefoperating officer of Telecomunicações de Mato Grosso—Telemat; chief operatingofficer of Telecomunicações do Amazonas—Telemazon; and manager of TelefônicaMunicipal S.A.—Telemusa.

 

*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 statesenator from 1995 to 2002 and the Governor of Minas Gerais from 1979 to1983.  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 of Cabinet of the Minas Gerais StateSecretary of Internal Affairs and Justice, Chief of the Minas Gerais StateGeneral Management Department and Chief Counselor for Municipalities Affairs ofthe 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 anddirector of the Municipal Accounting High School in Belo Horizonte from 1955 to1959.

 

*AntônioAdriano Silva* – Mr. Silva holds a businessadministration degree with a specialization in marketing. He has worked for several private entities,including Mesbla S.A., Empresa Brasileira de Varejo S.A.—Embrava, AgênciaJornalística Imagem, Associação Comercial de Minas, Asa Criação de Publicidade,and Coteminas.

 

75

----

 

*NiloBarroso Neto –* Mr. Barroso graduated in economics fromthe University of Brasília in 1979.  Hebegan the training course for a diplomatic career in 1977, completing it in1982.  In 1991 he completed the Master’scourse in liberal studies at Georgetown University, Washington, specializing inpolitical philosophy.  In 1983 and 1984he was Assistant Head of the Consular Division, and in subsequent years heldthe posts of Assistant Head of the Division for Market Studies and Research,and Assistant to the Secretary for Relations with Congress.  In 1993 he was an official of the GeneralSecretariat of the Presidency of the Republic. From 1991 to 1993 he was Assistant Counsel in Houston, USA.  He advised the annual conferences of theInterparliamentary Union in Bangkok (1987) and Mexico (1986), and participatedas an Advisor in the meetings with the International Monetary Fund and theWorld Bank in the period from 1989 through 1991.  He was a member of the Brazilian Congressmen’sDelegation to the Convention of the Republican Party of the United States, inHouston, in 1992.  He has been a memberof the presidential summit group for the political concentration andconsultation mechanisms in Santiago, Chile, since 1993.

 

*HaroldoGuimarães Brasil* – Mr. Guimarães was born on July 13,1962.  He graduated with a degree inelectrical engineering from PUC University of Minas Gerais, and earned adoctorate in economics from Rio de Janeiro Federal University in 1997.  He was awarded a Master’s Degree in BusinessAdministration by Minas Gerais Federal University in 1991, and completed theCentral Bank Technical Graduation Course (Sao Paulo, 1994), as well aspost-graduation studies in Public Policies from ENAP of Brasília (1990), and aspecialization in economic engineering from the Dom Cabral Foundation in1986.  He is a Director of Strategor Ltda– Consultoria e Treinamento, a Consultant of the Management DevelopmentFoundation, a Lecturer in the Master’s Degree Course in Business Administrationof the Pedro Leopoldo Foundation, Lecturer at IBMEC Educacional S.A., and avisiting professor in the Business Administration Master’s Degree Program ofMinas Gerais Federal University.

 

*CarlosAugusto Leite Brandão* – Mr. Brandão was born on January 3,1956.  He obtained a degree in electricalengineering from Minas Gerais Federal University in 1978, and subsequentlycompleted post-graduate studies in economic engineering at the Dom CabralFoundation in 1980.  In 2000 he attendedthe MBA course in finance at IBMEC (the Brazilian Capital MarketsInstitute).  He is currently the BusinessCoordination Director for AES Eletropaulo, where he is responsible forregulatory and institutional action, and management coordination of the group’scompanies in Brazil.  He is also chairmanof the Audit Committee of the CCEE (*Câmarade Comercialização de Energia Elétrica*), was a member of the MarketExecutive Committee of that organization, and is a member of the Board, andDirector, of ASMAE.  He has been a memberof IEEE – The Institute of Electrical Engineers, Inc. – since 1980, and aSenior Member since 1990.  He was head ofthe Rio de Janeiro section of the IEEE from 1990 to 1992, and the MinasGerais section (which he founded) from 1993 to 1996.  He was chairman of *Conselho Brasil*from1999 to 2001.  He is a member ofthe Editorial Council of the Power Computer Society, has held several posts inthe Power Engineering Society, and is the only foreign representative holding aposition in the United States Activities Board, headquartered in Washington,D.C.  He has been a lecturer in theComputer Science Center of Minas Gerais Federal University, various coursesheld by Eletrobrás and at the PUC University of Minas Gerais, and the InstitutoBrasil-Estados-Unidos.  He has more than50 publications in and outside Brazil, and published a book and CD-ROM jointlywith the João Pinheiro Foundation, on Models for the Electricity Sector, in1995.  He coordinated the course inRegulation of the Electricity Sector held by the João Pinheiro Foundation in1997, the first course of its type in Brazil. He began his career at CEMIG on March 15, 1979, and has held the positionsof Engineer, Manager of the Operation and Maintenance Engineering Division,Manager of the Operation and Maintenance Department, Manager of the Planningand Automation Department, Consultant for Sales to Large Clients, and Managerof the Transmission Department.  Mr. Brandãocurrently serves as CEMIG’s advisor to the Vice-Presidency and Consultant tothe Financial Director.

 

*AndréaPaula Fernandes* – Ms. Fernandes was born on October 19,1969.  In 1992 she obtained a degree inbusiness administration from FIRP (Faculdades Integradas Rio-Pretense), andcompleted postgraduate studies at the Getúlio Vargas Foundation (FGV) in1995.  She attended the ExtensionBusiness Course of the University of California at Berkeley in 1996, and theBanking Extension Course (GVPEC) of the Getúlio Vargas Foundation in 1998.  In 2001 she obtained an MBA in Finance fromIBMEC (the Brazilian Capital Markets Institute).  She is an advisor to the BusinessCoordination Directorate of 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 at Banco Santander Brasil S.A. from 1998 to2000, worked in the marketing department of Tyson Foods in the United States in1996, and worked at Citibank N.A in 1990 and 1991.

 

76

----

 

*AntonioLuiz Barros de Salles* – Mr. Salles was born on February 23,1946, and obtained a degree in legal and social sciences from São PauloUniversity (USP) in 1970, with postgraduate course in criminal law, with aspecialization in procedural law, from PUC University.  He is Legal Business Director for Eletropaulo Metropolitana Eletricidadede São Paulo S.A.  He was a careeremployee of Cesp, which he joined in 1967, and has been a lecturer at the WorkDevelopment and Organization Institution (Idort), and at the ManagementInstitute of the economics faculty of São Paulo University (USP).  He was Head of the Office of the Presidencyin 1987-1991, Vice-President of the Private Pension Funds Association Abrapp(1993-1995) and Superintendent Director of the Cesp Foundation (1993-1995).  He was technical advice manager to thegovernment of the State of São Paulo (in 1971-1975), Chief of Staff for theGovernor in the same administration, and Highways Secretary for the city of SãoPaulo (2000).

 

*JoséAugusto Pimentel Pessôa* – Mr. Pimentel was born on May 27,1937, and obtained a degree in Civil Engineering from Minas Gerais FederalUniversity (UFMG) in 1961, with additional specialization in water engineeringand services.  He worked for Tenenge aschief of the works office at Reduc, as a self-employed engineer (1963-1964),and as an engineer at CEMIG (1974-1974), where he worked in construction oftransmission lines and as a field reconnaissance engineer for damlocations.  In such capacity he wasresponsible for the structures sector of the Jaguara power plant.  He was head of the Studies and ProjectsDepartment of Eletronorte (Centrais Elétricas do Norte do Brasil S.A.) from1974 to 1978, and a director of Engevix from 1978 to 1994.  Since 1994 he has been an independentconsultant for Engevix.  He was directorof the National Union of Architecture and Engineering Companies (in 1994),Administrative Director and Director of the energy area of Amec, the MinasGerais Association of Consulting and Engineering Companies (in 1992), andcurrently he is a consulting engineer for Amec. He was a Member and Council Member of the Brazilian Large Dams Committeefrom 1977 to 1996, and in 1977 was Coordinator of the GTCN – the Northern CostsWorking 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 BrazilianSuperior School of War in 1973. Presently, Mr. Cunha is an agribusiness entrepreneur in northernMinas Gerais.  Since 1993, he has been adirector of Furnas.  In 1993 he was thechairman of BNDES.  He was thecongressional representative for six terms from 1963 to 1987, andrepresentative of the Minas Gerais House of Representatives for two terms from1955 to 1962.  Prior to that, Mr. Cunhawas the Chief of the Cabinet of the Minas Gerais State Secretary ofAgriculture, Commerce and Labor.  In 1988Mr. Cunha was nominated Minister of the Brazilian Court of Audit, havinghis name approved by the Brazilian Congress, but for personal reasons, hedeclined before taking office.

 

*MariaEstela Kubitschek Lopes* – Mrs. Lopes holds a degree inarchitecture and is an interior designer and entrepreneur.  She is a managing partner of DF ConsultoresLtda. and of Santa Júlia Importação, Exportação e Participações.  Mrs. Lopes is also the adviser to thepresident of the Municipal Theater Foundation of the City of Rio de Janeiro, tothe president of the Friends of the State of Rio de Janeiro—AME-RIO and to thepresident of the board of Casa Santa Ignez (a philanthropic associationresponsible for the nourishment and education of children and aid to low-incomefamilies in the Rocinha neighborhood in Rio de Janeiro).  She was one of the founders of Memorial JK,an organization founded in the memory of Juscelino Kubitschek de Oliveira(former President of Brazil), and served as its vice-president from September 1981to May 2000 and as acting president since October 2000.  Mrs. Lopes has also served as presidentof the council of the Cultural Institute Cesgranrio, vice-president of thecouncil of the Women’s Bank, president of the Beneficent Institutions of theState of Rio de Janeiro and a member of the council of Casa das Palmeiras, acultural institution.  Mrs. Lopeshas received several cultural and social merit awards.

 

*AlexandreHeringer Lisboa* – Mr. Lisboa holds a degree in electricalengineering from the Polytechnic Institute of the Pontifical CatholicUniversity of Minas Gerais and a master’s degree in mechanical engineering withan emphasis in solar energy from the Federal University of Paraíba, in the cityof João Pessoa (State of Paraíba).  Healso has received specialized wind energy training from the DeutschesWindenergie-Institut and from the Summer School on Wind Energy Technology atthe University of Oldenburg in Germany.  Mr. Lisboahas worked as an engineer for CEMIG since May 1985 and he is a director ofSENGE as well as a counselor of the Regional Council of Engineering andArchitecture.  Mr. Lisboa served asan alternate member of the board of directors of CEMIG from January 1999to December 2000.  He was a researcherfor and a consultant to the Technological Foundation Center of MinasGerais—CETEC from November 1983 to April 1985.  From January 1977 to May 1979, hewas a trainee at Usiminas, Companhia Siderúrgica Belgo-Mineira and Delle-AlstomS.A.—DASA.

 

77

----

 

*José Luiz Alquéres*– Mr. Alguéres was born on March 31, 1944.  He graduated with a degree in civilengineering in 1966, with post-graduation in urban and regional planning inBrazil and electricity planning in the United States and France.  He is Honorary Vice-President of the WorldEnergy Council and Vice-President of ABDIB, the Brazilian Infrastructure andBasic Industries Association.  He is aPartner-Director of JLA – JLAlquéres Engenharia Consultiva Ltda.  Through this firm he now exercisesnon-executive functions providing services at the Consultative Council level,namely as: Country President of ALSTOM do Brasil, a world leader in highwaytransport and energy infrastructure; Country President of MDU do Brasil, acompany which invests in the mining and energy sectors; and is a member of theStrategic Council of ALCOA do Brasil, Banco CALYON and HOLCIM S.A.  He was Executive Director of Cia.Bozano-Simonsen (1995-1998), National Energy Secretary (1992), President ofEletrobrás (1993-1994) and President of Cerj, Director of BNDESPar (of theBrazilian Development Bank) and Light; and Board Member of Itaipu Binacional,Furnas, Chesf, CEMIG, Escelsa, CEG, CPFL, Comgás and other companies.* *Inaddition to his professional activities, he is active in volunteer work,chairing the French-Brazilian Culture and Cooperation Association, a member ofthe Council of the National Fine Arts Museum and Vice-President of theBrazilian Oncology Institute.

 

**Board ofExecutive Officers**

 

Our Board of ExecutiveOfficers is responsible for the execution of decisions made by our Board ofDirectors and for our day-to-day management. Our executive officers have individual responsibilities established by ourby-laws and serve for three-year terms. The terms of the current executive officers expire in April 2006.  They are elected by our Board ofDirectors.  Generally, ordinary meetingsare held at least twice monthly and extraordinary meetings are held whenevercalled by the Chief Executive Officer or by two executive officers other thanthe Chief Executive Officer.

 

The names, positions anddates of initial appointment of our executive officers are as follows:

 
| **Name**                    | ** ** | **Position**                                             | ** ** | **Date of Initial  Appointment** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|
| Djalma Bastos de Morais     |       | Chief Executive Officer                                  |       | January 14, 1999            |       |
| Francisco Sales  Dias Horta |       | Executive Vice-President                                 |       | June 2, 2003                |       |
| Celso Ferreira              |       | Chief Planning, Projects and Construction Officer        |       | February 11, 2003           |       |
| Elmar de Oliveira Santana   |       | Chief Energy Generation and Transmission Officer         |       | February 11, 2003           |       |
| José Maria de Macedo   |       | Chief Energy Distribution and Commercialization  Officer |       | February 11, 2003           |       |
| Flávio Decat de  Moura |       | Chief Financial and Investor Relations Officer           |       | February 11, 2003           |       |
| Heleni de Mello  Fonseca    |       | Chief Corporate Management Officer                       |       | February 11, 2003           |       |

 

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

 

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

 

*FranciscoSales Dias Horta* – Mr. Horta holds a degree in businessadministration from the faculty of UNA. He is a congressional representative and the president of the MinasGerais Cristian Youth Association, Latin American Confederation of CristianYouth Associations and of the Benjamin Guimarães Foundation.  Mr. Horta was one of the founders of theShop Owner Club Foundation for assistance of underage teenagers.  He is an entrepreneur in the optical sector,owning shops in the cities of Belo Horizonte and Sete Lagoas in Minas Gerais,and in Manaus, State of Amazonas.  He isa director and president of the Minas Gerais Trading Association, Minas GeraisRetail Association, Belo Horizonte Shopper Owners Chamber and of the EconomicPolitics Council of the State of Minas Gerais Industry Federation.

 

78

----

 

*CelsoFerreira* – Mr. Ferreira holds a degree in electrical andmechanical engineering from the Federal Engineering School of Itajubá in theState of Minas Gerais and a master’s degree in electric system engineering fromthe Rensselaer Polytechnic Institute and has completed coursework in electricalsystem operation and energy trading in Brazil and abroad, including courses atthe International Agency for Nuclear Energy in Paris and Commonwealth EdisonCo. in Chicago.  Since March 2003,he has been the Chief Executive Officer of the following companies: UsinaTérmica Ipatinga S.A., Cemig Capim Branco S.A., Usina Termelétrica BarreiroS.A. and Central Termelétrica de Cogeração S.A. He is the Chief Technical Officer of Efficientia S.A.  Mr. Ferreira was the chief generationand commercialization executive officer of Furnas from 1991 to 2003, chairmanof that company for four months in 1999 and a member of the board of directorsseveral times from 1991 to 2003.  He alsoserved as a director of the ONS, serving as chairman from its foundation in1998 to the beginning of 2003.  He was arepresentative of Furnas on the Wholesale Energy Market, participating indiscussions regarding certain Wholesale Energy Market rulings and the GeneralAgreement of the Electricity Sector.  Mr. Ferreirawas a professor of the Engineering School of the University of Rio de Janeirofrom 1970 to 1980.  From 1966 to 1970, heworked as an engineer for Cia. Auxiliar de Empresas Elétricas—CAEEB.  He was one of the founders of AssociaçãoBrasileira das Empresas Geradoras de Energia Elétricas—ABRAGE (BrazilianElectricity Generation Company Association) and of Associação Brasileira das GrandesEmpresas de Transmissão – ABRATE (Brazilian Transmission CompanyAssociation).  Mr. Ferreira has alsoserved as a member of several associations, including the energy commission ofthe Commercial Association of Rio de Janeiro from 1999 to 2000 and of thefiscal council of Companhia Paranaense de Energia – Copel.

 

*Elmarde Oliveira Santana* – Mr. Santana holds a degree inelectrical engineering from the Pontifical Catholic University of Minas Geraisand a master’s degree in business administration from IBMEC (the BrazilianCapital Markets Institute).  Since March 2003,he has been the Chief Executive Officer of Efficientia S.A. and Cemig PCHS.A.  He is the Executive Officer ofUsina Térmica Ipatinga S.A., Sá Carvalho S.A., Horizontes Energia S.A., CemigTrading S.A. and Central Hidrelétrica Pai Joaquim S.A.  He worked from 1977 to 1983 at DAE/MG (awater and electricity utility owned by the State of Minas Gerais) as the ruralelectrification coordinator and as an operations and distribution superintendent.  From 1983 to 2001, he worked at CEMIG as anengineer, as sales and distribution superintendent and as assistant to the headof sales and distribution.  From December 2001to April 2002, he was the Secretary of Mines and Energy for the State ofMinas Gerais.

 

*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 andmanagement.  He was a trainee at theBonneville Power Administration in Portland, Texas, at the Tennessee ValleyAuthority, at the Bureau of Reclamation in Denver, Colorado and SouthernCalifornia Edison in California. Since March 2003, he has been theExecutive Officer of Cemig Trading S.A.  Mr. Macedoworked at CEMIG from September 1969 to May 1994, when he retired assuperintendent of electricity transmission. After his retirement from CEMIG, Mr. Macedo was an organizer ofCooperativa de Prestação de Serviços de Engenharia Ltda., where he currentlyserves as president.  Prior to joiningCEMIG, Mr. Macedo served as an engineer at Sociedade InstalaçõesTécnicas—SIT.  Mr. Macedo hasconducted several studies and seminars on the electricity field in Brazil.

 

*FlávioDecat de Moura* – Mr. Moura holds a degree in electronicand electrical engineering from the Federal University of Minas Gerais.  He has been the Chief Executive Officer ofCentral Hidrelétrica Pai Joaquim S.A. since January 2005, of Gasmig since December 2004,and of Cemig Trading S.A. since March 2003.  He has been the Executive Officer of CemigPCH S.A., Usina Termelétrica Barreiro S.A, Cemig Capim Branco Energia S.A. andHorizontes Energia S.A since April 2004, of Central Termelétrica deCogeração S.A., Sá Carvalho S.A. and Usina Térmica Ipatinga S.A. since April 2003,and of Efficientia S.A. since March 2003. He served as a director and chief executive officer of Electronuclear,the Federal Government’s nuclear power agency, from May 2001 to January 2003and as chief development officer of Sithe Energies, Inc. from 1998 to2000.  From 1996 to 1997 he wasvice-president and chief electricity distribution officer of Empresa Energéticade Mato Grosso do Sul S.A.—Enersul.  In1993, Mr. Moura was the chief technical and engineering officer ofItaipu.  He served as the chiefelectricity production officer of Empresa Transmissora de Energia Elétrica doSul do Brasil S.A.—Electrosul from 1992 to 1993 and the superintendent ofengineering of Itaipu from 1983 to 1992. Mr. Moura was also the assistant to the chief executive officer ofItaipu and engineer and manager of several divisions of Furnas from 1970 to1982.

 

*Helenide Mello Fonseca* - Mrs. Fonseca graduated with a degreein electrical engineering with a specialization in electronics andtelecommunications from the National Telecommunications Institute – INATEL

 

79

----

 

and completedpost-graduate studies in marketing and business development at Fundação GetúlioVargas—FGV.  Since April 2003 shehas been the Executive Officer of Central Termelétrica de Cogeração S.A. andsince March 2003 she has been the Chief Executive Officer of Sá CarvalhoS.A. and Horizontes Energia S.A. and the Executive Officer of Cemig PCH S.A.,Cemig Capim Branco Energia S.A. and Usina Termelétrica Barreiro S.A. She wasthe chief officer of entrepreneurial business of Telemar, the phone company ofthe State of Bahía, Brazil, from August 2000 to November 2001, thechief officer of corporate and retail business of Telemar from August 1998to August 2000, the chief of services of Telemig, a phone company in theState of Minas Gerais, from January 1996 to August 1998 and the chiefoperation officer of Telemig and Telemar from July 1995 to December 1995.  Mrs. Fonseca also served as a director ofthe Telecommunications Department of the State of Minas Gerais—DETEL/MG, orDETEL/MG, from June 1991 to July 1995 and the manager of theimplementation of data communication services of Empresa Brasileira deTelecomunicações—Embratel in Minas Gerais from 1988 to 1991.  From 1976 to 1987, she worked at theTelecommunications Department of DETEL/MG as an engineer, technical officer andengineering superintendent.

 

**Compensationof Directors and Executive Officers**

 

For the year ended December 31,2004, the aggregate amount of compensation, including pension and otherretirement benefits, that we paid to all directors and executive officers wasapproximately R$3.3 million.

 

**FiscalCouncil**

 

Our Fiscal Council, whichgenerally meets once every three months, consists of three to five members andtheir respective alternates elected by our shareholders at the annual meetingfor 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 at least 10%, individually or inthe aggregate, are entitled to elect one member of the Fiscal Council and acorresponding alternate.  The primaryresponsibility of the Fiscal Council, which is independent from management andfrom the independent public accountants appointed by the Board of Directors, isto review our financial statements and report on them to our shareholders.  The Fiscal Council is also entitled to give opinionson any proposals from our management to be submitted to the shareholders’meeting related to (i) changes in our share capital, (ii) issuancesof debentures or rights offerings entitling the holder to subscribe for equity(bonus de subscrição), (iii) investment plans and capital expendituresbudgets, (iv) distribution of dividends, (v) changes to our corporateform and (vi) corporate restructurings such as mergers, consolidations andspin-offs.  The Fiscal Council alsoexamines the activities of management and reports these activities to theshareholders.

 

The current members ofthe Fiscal Council and their alternates, all of whose terms expire on April 30,2006, 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           |       |
| Itaumary Teles de Oliveira(2)                       |       | Member       |       | April 29, 2005              |       |
| Ronald Gastão Andrade Reis                     |       | Alternate    |       | April 30, 1998              |       |
| Marcus Eolo de Lamounier Bicalho                    |       | Alternate    |       | February 27, 2003           |       |
| Augusto Cézar Calazans Lopas(1)                |       | Alternate    |       | April 30, 2003              |       |
| Ary Barcelos da Silva(2)                            |       | Alternate    |       | April 29, 2005              |       |
| Aliomar Silva Lima                                  |       | Alternate    |       | February 27, 2003           |       |

 

----

(1)           Electedby Southern.

(2)           Electedby shareholders holding our preferred shares.

 

80

----

 

**ConsumerCouncil**

 

We have established aConsumer Council pursuant to Brazilian law, which is comprised ofrepresentatives of consumer groups and advocacy organizations, but not membersof our Board of Directors.  The ConsumerCouncil advises us as to service and other concerns of our customers.

 

**AuditCommittee**

 

CEMIG has not yetestablished a formal audit committee. Our Board of Directors currently serves as our audit committee forpurposes of the Sarbanes-Oxley Act of 2002 and the related regulations.

 

**Employees**

 

As of December 31,2004, we had 10,668 employees, of which 161 were at the management level.  During the year ended on that date we had anaverage of 327  temporary employees.  As of December 31, 2003, we had 11,302employees, of which 156 were at the management level, with an average of 390temporary employees during the period then ended.  As of December 31, 2002, we had 11,468employees, of which 147 were at the management level, with an average of 501temporary employees during the period then ended.  This table shows the breakdown of ouremployees by type on those dates:

 
| ** **                                        | ** ** | **Number of Employees at** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
| Managers                                          |       | 161                        |       | 156 |   | 147 |   |
| Professional  staff                               |       | 1,285                      |       | 1,409 |   | 1,424 |   |
| Operational  technical staff                      |       | (*                         | )          | 7,880 |   | 8,112 |   |
| Office employees                                  |       | (*                         | )          | 1,857 |   | 1,785 |   |
| Operational  technical staff and Office employees |       | 9,222                      |       | (* | ) | (* | ) |
|                                              |       |                       |       |   |   |   |   |
| Total                                             |       | 10,668                     |       | 11,302 |   | 11,468 |   |

 

----

(*) In 2004, we put inplace the new Career and Remuneration Plan, bringing together into a singlecategory the previous career plans for operational, technical andadministrative staff.

 

Once a year we holdcollective negotiation meetings with the unions that represent ouremployees.  The resulting contractremains in effect for the subsequent 12–month period beginning on November 1.  About 10 years ago CEMIG ceased to follow theprevious market practice in Brazil of automatically adjusting salaries based oninflation.

 

In November 2004, we completed negotiation of the annualcollective agreement for the period from November 1, 2004 to October 31,2005, after a wide-ranging discussion of all the terms and conditions with theunions that represent our employees.  Theresulting agreement established salary increases on a sliding scale (shown inthe table below) and an extraordinary distribution of amounts under the profit-sharingprogram in the amount of 121% of the basic remuneration of the employees in November 2004.

 
| **Monthly  Base salary (R$)** | ** ** | **%**  | ** ** |
|-------------------------------|------------|--------|------------|
| Up to 2,254                   |       | 7.26   |       |
| From 2,255                    | to 4,770   |   | 7.00       |   |
| From 4,771                    | to 7,103   |   | 6.30       |   |
| From 7,104                    | to 9,891   |   | 5.60       |   |
| Over 9,891                    |       | 4.90   |       |

 

In 1995, we established aprofit-sharing program for the employees in conformity with the applicableBrazilian labor legislation.  Under thisprogram, we may not contribute an amount to the employee profit sharing planthat is in excess of 25% of the total dividends proposed for that year.

 

81

----

 

As of January 1,2003, we implemented changes to our exiting employee health care plans.  The changes are a result of an agreement wereached with our employees’ labor unions, most of which are represented bySindieletro.  The changes altered thecontribution criteria that we, our employees and our retirees are responsiblefor and the types of benefits covered in each plan.

 

In the last 4 years therehas been no stoppage of work by our employees.  We are unable to predict what effect, if any,future labor litigation could or may have on our results of our operations orour financial condition.  Similarly, weare unable to predict what effect any changes in the Brazilian labor-lawregulations may have on the Company, if any.

 

In December 2003, inorder to effectively manage our employment relations while following ourstrategic guidelines for growth and the addition of value, we implemented avoluntary employee termination program.

 

In 2004 a total of 1,101employees accepted the terms of the company’s voluntary employee terminationprogram. Of these, 656 left the company during 2004; a further 311 completedthe procedures and left in January 2005. Of the remaining 134 employees,20 will retire by the end of 2006; and 114 have been withdrawn from theprogram, in accordance with the terms of the contracts between the company andeach employee, because the Government Social Security Organization (INSS) didnot accept them for early retirement.

 

In 2003, the Careers andRemuneration Plan was approved.  The goalof this plan is to provide us with the remuneration tools necessary to maintainan equitable and competitive pay structure and establish criteria forpromotions.  The plan was implemented in January 2004for professional staff, and in March 2004 for the administrative andoperational employees.  An internalcommittee, with representatives of both the company and the labor unions, wascreated for maintenance of the plan.

 

The total number of workaccidents, for our own employees and those of contracting companies, was lowerin 2004 than in 2003, continuing a downtrend over the last four years.  In 2004, we again had no fatal accidentsamong our own employees.

 

**Share Ownership**

 

Each of our directors andexecutive officers beneficially owns less than 1% of our preferred shares.

 

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

 

**PrincipalShareholders**

 

As of December 31,2004, the State Government owned 36,329,063,248 common shares, or 51.26% of ouroutstanding voting stock, and 2,771,169,109 preferred shares, or approximately3.04% of those outstanding.  As of thesame date, Southern, our second largest shareholder, owned 23,362,956,173common shares, or approximately 32.96% of those outstanding.  Southern is a joint venture formed in1994.  We believe that a principalparticipant in Southern is Cayman Energy Traders, a subsidiary of MirantCorporation (formerly Southern Energy Inc.), a large United States-based powercompany.  We believe that the othersignificant member of Southern is, as of December 31, 2004, AESCorporation, a global power company based in Arlington, Virginia that isengaged in the energy generation, distribution and retail supply businesses.  We believe that the Opportunity Fund, aBrazilian investment fund, has a minority interest in Southern through 524Participações S.A.  Our principalshareholders do not have different voting rights with respect to those sharesthey own.

 

The following table setsforth certain information regarding the ownership of our outstanding commonshares and preferred shares at December 31, 2004.

 

82

----

 
| **Shareholder**                                  | ** ** | **Common  Shares** | ** ** | **%  of Class** | ** ** | **Preferred Shares** | ** ** | **%  of Class** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|-----------------|------------|
| State Government  (1)                            |       | 36,329,063,248     |       | 51.26           |       | 2,771,169,109        |       | 3.04            |       |
| Southern                                         |       | 23,362,956,173     |       | 32.96           |       |                 |       |            |       |
| All directors  and executive officers as a group |       | 2,545,665          |       |            |       | 128,138              |       |            |       |
| Other                                            |       | 11,179,602,837     |       | 15.78           |       | 88,439,225,452       |       | 96.88           |       |
| 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          |       |

 

----

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

 

Since our incorporation,our operations have been influenced by the fact that the State Governmentcontrols us.  Our operations have had andwill continue to have an important impact on the development of business andindustry in Minas Gerais and on social conditions in the state.  The State Government has from time to time inthe 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. Key Information—Risk Factors—Risks Relating to CEMIG—We are controlledby the State Government.”

 

As of December 31,2004, we had 19 common shareholders in the United States, holding a total of2,159,909,610 common shares.  We also had181 preferred shareholders in the United States, holding a total of21,140,861,015 preferred shares.  Thesenumbers do not include the 14,530,135,788 preferred shares converted into ADRs.

 

We are not aware of anysignificant changes in the percentage ownership of any shareholders that held5% or more of our outstanding voting shares during the past three years.  Based on publicly available filings with theSEC, we are aware of the following changes in ownership of our outstandingpreferred shares.  On March 8, 2005,Capital Group International, Inc., or CGII, a foreign investmentmanagement company, acquired, on behalf of its clients, ADRs that increased itsholdings of preferred shares of CEMIG to 4,598,610,000, corresponding to 5.03%of CEMIG’s preferred shares.  Inaddition, Capital Research and Management Company, also a foreign investmentmanagement company and an affiliate of CGII, holds ADRs representing2,702,900,000 preferred shares in the Company, corresponding to 2.96% of thepreferred shares.  On April 12,2005, the aggregate proprietary position of the UBS Group****in preferred shares of CEMIG increased to6,098,366,579 preferred shares, representing 6.68% of the Company’s totalpreferred shares.

 

Although our by-laws donot provide any restrictions concerning a change in our control, a state lawauthorizing a change of control would be required for a change of control totake place.  Because we are astate-controlled company, the sale of more than 50% of the voting stock ofCEMIG by the State Government requires the passage of specific authorizinglegislation by the legislature of Minas Gerais.

 

**Related Party Transactions**

 

We are party to thefollowing 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

 

83

----

 

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

 

For a more detaileddiscussion of these transactions, see Notes 3, 8, 9, 13, 14, 16, 19 and 21 toour consolidated financial statements.

 

# **Item 8.**            FinancialInformation

# ** **

**ConsolidatedFinancial Statements and Other Financial Information**

 

Please refer to ourfinancial statements that appear beginning on page F–1 of this document aswell as “Item 3.  KeyInformation—Selected Consolidated Financial Data.”

 

**LegalProceedings**

 

We are affected by anongoing dispute between our shareholders. We are also defending several judicial proceedings involving rateincreases, taxes and contributions, labor and pension fund obligations andcivil liabilities, as well as several administrative proceedings regarding taxobligations, environmental penalties and other charges imposed by governmentalagencies, including ANEEL.  We recognizecontingencies only when a loss is probable and estimable.  The most relevant proceedings in which we areinvolved are summarized below.  See alsonote 18 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 PartyTransactions—Principal Shareholders,” Southern and the State Government enteredinto a shareholders’ agreement that contained special quorum and vetoprovisions granting Southern expanded control over certain decisions.  In 1999, after a new State Governmentadministration took office, the State Government filed a lawsuit seeking tonullify the shareholders’ agreement on the grounds that these specialprovisions constituted an unlawful transfer of control from us to Southern underprinciples of Brazilian constitutional law, and claiming in particular that theState Government may only cede control of us pursuant to specific statelegislation providing for the same.

 

On March 21, 2000,the First Court of Fazenda Pública e Autarquias in Belo Horizonte rendered adecision declaring the shareholders’ agreement null and void, and this decisionwas ratified on August 7, 2001 by the Minas Gerais State Court ofAppeals.  At present, the StateGovernment has been restored to its position as our sole controllingshareholder and none of the special quorum or veto provisions are ineffect.  This decision was appealed tothe Superior Tribunal de Justiça (Superior Court of Justice), which upheld thedecision of the Minas Gerais State Court of Appeals in December 2003.  The decision of the Superior Tribunal deJustiça is subject to a request for amendment and therefore the effectivenessof the shareholders’ agreement and control of CEMIG remain subject to furtherjudicial challenge in the Supreme Court (*SupremoTribunal Federal*).

 

*RateIncreases*

 

We are the defendant inseveral lawsuits brought by industrial customers alleging that increases inelectricity rates during a price freeze imposed by the Federal Government from March throughNovember 1986, known as the Cruzado Plan, were illegal.  The plaintiffs further allege that all ourrates after the Cruzado Plan period were illegal in part because they includedthe Cruzado Plan period increases in the amounts that served as the basis forcalculating the further increases.  Someof these claims have been decided at the trial court level in our favor,whereas others have been decided in favor of our customers.  All of the cases that have been decided atthe trial court level have been appealed to the Superior Tribunal de Justiça(Superior Court of Justice), which ruled that the plaintiffs were entitled onlyto reimbursement for rate increases introduced during the Cruzado Plan.  We are actively contesting all of theaforementioned rate increase claims.  Inthe aggregate, these rate increase claims brought against us amounted toR$105.1 million as of December 31, 2004, and at that date we had accrued aliability for the full amount of those claims.

 

84

----

 

We are also a defendantin lawsuits and class actions brought by customers, consumer rights groups andthe office of the public prosecutor of Minas Gerais contesting the rates wecharge our customers, the application of the rate increases determined by ANEELand the rate subsidies granted to low income customers.  These lawsuits involve claims for thesuspension of the rate increases and for the reimbursement to our customers oftwice the amount of any additional rates we collected.  All our rate increases are granted based onANEEL’s prior authorization and we believe we have a meritorious defense toeach of these lawsuits.  It is notpossible at the present time to estimate the amounts involved in theseclaims.  We have not accrued anyliability related to these claims because we believe that we have a meritoriousdefense.

 

The Associação Brasileirade Consumidores – ABC (Brazilian Association of Consumers) has filed a classaction lawsuit against us, seeking to prevent us from suspending the energysupply in cases of customer default.  Wereceived a favorable decision at the trial court level that is subject toappeal.  We believe we have a meritoriousdefense and have not accrued any liability related to this lawsuit.

 

We are a defendant,together with *Comercializadora Brasileira deEnergia Elétrica* – CBEE, in several lawsuits filed between February 2002and March 2004 contesting the Encargo de Capacidade Emergencial (EmergencyCapacity Charge) which we collect from our customers on behalf of theCBEE.  It is not possible at the presenttime to estimate the amounts involved in these claims.  However, we have not accrued any liabilityrelated to these claims because we believe we have a meritorious defense.

 

In addition, the FederalPublic Auditing Court is challenging the criteria used by ANEEL to calculatethe adjustments we applied to our rates in 2003 and in connection with theenergy reduction emergency program.  See “—RegulatoryMatters.”

 

*Taxesand Other Contributions*

 

We are party to a numberof proceedings and claims involving the Federal Government as well as otherproceedings and claims arising in the ordinary course of business.  These proceedings and claims include judicialdisputes regarding the payment of taxes and contributions, including twodisputes regarding social contribution tax, for which we have accrued a totalliability of R$129.2 million as of December 31, 2004.  We also are involved in disputes regardingthe ISS tax (R$24.9 million), the Imposto de Transmissão Causa Mortis e Doação –ITCMD (inheritance and donation tax), three fiscal executions, involvingR$112.5 million, R$7.5 million and R$8.0 million), and the COFINS revenue tax(R$230.2 million) for which we have not recorded any reserve, as we believethat we have a meritorious defense.

 

In addition, we are aparty to two Finsocial contribution disputes. In connection with one of these disputes, which was initiated in 1990,we have made a judicial deposit and have recorded a loss provision, each equivalentto the historical litigated amount of R$900 thousand.  We have also accrued a reserve of R$20million for the full amount of the other dispute.  We believe our chances of success in theselawsuits are remote.

 

We have also contested anumber of administrative proceedings asserted by federal tax authorities withrespect to an income tax set-off resulting from an adjustment made in 2001 toour consolidated financial statements prepared in accordance with accountingpractices adopted in Brazil for the years ended December 31, 1997, 1998 and1999.  The adjustment related to newaccounting rules for pension fund obligations was established by CVMInstruction No. 371 of December 13, 2000.  We received a partially favorable decisionrelative to the years 1997 and 1998, however an administrative ruling issued bythe Office of the Attorney General of the National Treasury in 2004 may allowfor additional judicial consideration of these issues.  As for the year 1999, for which we receivedan unfavorable decision, we filed an injunction and believe we have ameritorious defense that supports the procedures adopted.  Therefore, no reserve has been recorded forthis claim.  We estimate the amountinvolved in these claims to be R$480.7 million as of December 31, 2004.

 

In 2003, as a consequenceof the change in our accounting practice discussed in the above paragraph, thefederal tax authorities, after performing an inspection of our tax returns forthe years 1997-2001, issued an assessment notice in the amount of R$1,537million, claiming that we did not pay all our tax liabilities related to thosetax years.  We submitted anadministrative defense requesting that such assessment notice be canceled,since the tax authorities did not consider our amended tax returns which havebeen filed.  We believe such amended tax

 

85

----

 

returns show that we haveproperly settled the tax liabilities challenged, and therefore no reserve hasbeen recorded for this claim

 

Lately, some Municipalities of the State of Minas Geraisassessed us for the payment of the tax named *Taxa deOcupação do Solo*.  There areseveral administrative proceedings and lawsuits related to this matter, in thetotal amount of approximately R$10.7 million. We have not accrued any reservesfor this amount since we believe we have meritorious defenses in thesedisputes.

 

The State of Minas Gerais filed several administrativeproceedings against us, alleging that the added-value tax (*Impostosobre Circulação de Mercadoria* – ICMS) has not been collected by somesellers of energy distributed through Cemig, and that Cemig would be aco-obligor with respect to the payment of such tax.  We have not accrued reserves in connectionwith these administrative proceedings since we believe we have meritoriousdefenses in these disputes.

 

We have also contested three administrative proceedingsasserted by federal tax authorities regarding the alleged absence of payment ofthe rural real estate tax (*Imposto Territorial Rural*– ITR), related to the power plants Miranda, Emborcação and São Simão, whichinvolve a total amount of approximately R$30.3 million.  We have not accrued reserves in connectionwith these administrative proceedings since we believe we have meritoriousdefenses in these disputes.

 

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 Law No. 10,604/02.  Recently, the State of Minas Gerais issuedDecree No. 43,999/05 charging the ICMS on this subsidy.  We believe the subsidy is not taxable and weare therefore not collecting the ICMS on the subsidy.  We may be assessed by the State of MinasGerais with regard to this matter, but we believe we have a meritorious defense.  We estimate the contingency to beapproximately R$35 million.

 

*LaborObligations*

 

We are defending a numberof labor-related claims brought by our employees and by third parties, forwhich we are secondarily liable.  Theseclaims generally refer to overtime and hazardous occupation compensation.  Employees must file a claim for thesepayments within two years of the termination of their employmentagreement.  As of December 31, 2004,these employees were seeking, in the aggregate, approximately R$138.5 millionin compensation, and at that date we had accrued a liability of R$110.9 millionwith respect to these claims.

 

*Claimsin the Ordinary Course of Business*

 

We are a party to severalcivil claims involving small amounts brought by people who have suffered damagesarising mainly from accidents that occurred during the ordinary course of ourbusiness and damages suffered as a result of the interruption of the supply ofenergy to them.  We are also a party toclaims under contractual and other commercial obligations.  These claims totaled an estimated R$150.4million as of December 31, 2004.  Asof that date, we had accrued a liability of R$25.9 million with respect tothese claims.  We have not accrued aliability with respect to the full amount of the claims because we believe wehave a meritorious defense to certain portions of these claims.

 

We have contested a lawsuit brought by Sistron Sistemas eCompanhia Ltda, referring to alleged damages estimated at R$ 94.7 millionarising from a services agreement that was affected by economic distress causedby the real devaluation in 1999.  We havenot accrued any liability related to this claim, as we believe we have ameritorious defense.

 

*Legal Proceedings Related toEnvironmental Matters*

 

We are a defendant, alongwith CVRD, Comercial e Agrícola Paineiras and Companhia Mineira de Metais, in aclass action lawsuit brought by the Federal Prosecutor, concerning theenvironmental licensing of the Capim

 

86

----

 

Branco I and Capim BrancoII hydroelectric power plants.  Thislawsuit alleges that we did not obtain proper licensing for these projects andseeks to nullify the environmental licenses relating to these power plants.

 

We have not accrued any liability related to this claim aswe believe we have a meritorious defense. We are also a defendant, along with CVRD, in a class actionlawsuit brought by the Federal Prosecutor, concerning the Aimorés hydroelectricpower plant.  This lawsuit alleges thatwe did not obtain proper licensing for this project and seeks to nullify theenvironmental licenses relating to this plant as well as the relatedconcessions.  We have not accrued anyliability related to this claim as we believe we have a meritorious defense.

 

*RegulatoryMatters*

 

Priorto 1993, electric utilities in Brazil were guaranteed a rate of return oninvestments in assets used to provide electric service to customers, the ratescharged to customers were uniform throughout the country, and profits from moreprofitable utilities were reallocated to less profitable ones so that the rateof return for all companies would equal the national average.  Shortfalls experienced by most electricutilities in Brazil were accounted for in each company’s CRC Account.  When the CRC Account and the guaranteedreturn concept were abolished, we used our positive balances to offset ourliabilities to the Federal Government.

 

ANEEL has brought an administrative proceeding againstus, contesting a R$610.9 million credit related to such positive balance.  On October 31, 2002 ANEEL issued a finaladministrative decision against us.  On January 9,2004, the Brazilian Treasury Authority (“Secretaria do Tesouro Nacional”)issued an Official Collection Letter to us in the amount of R$516.2 million tobe paid by January 30, 2004.  Wefiled a writ of mandamus to suspend our inclusion in the national non-payersregistry (“CADIN”).  Although the reliefwas denied by the lower court, we appealed to the Federal Court of the FirstCircuit which granted us a temporary injunction to suspend the inclusion in theCADIN.  We have not accrued any liabilityrelated to this claim.

 

We are a defendant in anadministrative proceeding brought by ANEEL because we did not meet the September 21,2002 deadline for completion of the unbundling process.  On November 11, 2002, ANEEL imposed afine 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 November 28, 2002, weappealed ANEEL’s fine.  On February 23,2005 ANEEL issued a ruling reducing the fine to R$2.7 million.  We continue to contest this fine.  We have not recorded any reserve since webelieve we have a meritorious defense.

 

On June 12, 2003,ANEEL imposed a R$6 million fine on us for our alleged failure to comply withcertain electric power supply quality standards with respect to ourcustomers.  We have recorded a fullprovision for this fine.

 

In December 2002 wefiled a *writ of mandamus* againstANEEL and the CCEE contesting the calculation of the amounts due under thesettlement process held by the CCEE between December 2002 and January 2003in connection with purchases of electricity during the rationing in period of2001 – 2002.  We believe that, based onthe classification of CEMIG under ANEEL’s Resolution No. 447, the CCEEincorrectly calculated the amount of debt that we had accrued in respect of ourCCEE purchases during the rationing period. This debt, which we believe to be in the amount of approximately R$143million, was due from CEMIG to the other participants of the CCEE.  A condition to receipt of the extraordinaryrate adjustments (*RecomposiçãoTarifária Extraordinária*), or RTE, is that the recipient must not to be involved in any lawsuit with ANEELthat questions the RTE or any related regulation.  As CEMIG has contested the settlement processconducted by the CCEE, ANEEL issued an order to suspend the payment of the RTEto CEMIG.  As a result of thisdecision, the payment of approximately R$143 million due to CEMIG was alsosuspended.  In January 2003, wefiled a lawsuit seeking to reverse ANEEL’s ruling regarding the suspension ofthe RTE payments to us.  The FederalCourt of Appeals of the First Circuit issued a preliminary injunction in ourfavor and suspended ANEEL’s ruling.  In December 2004,we withdrew our claim against ANEEL and the CCEE and entered into agreementwith ANEEL and the other participants in the CCEE.  The withdrawal is still subject to the court’sapproval.  We have accrued a liability of R$142.6 millionrelated to this matter.  See “Item10. Additional Information — Material Contracts — Agreement between CEMIG andcompanies in the New Agreement of the Electric Sector.”

 

87

----

 

On November 14,2003, the Federal Public Auditing Court, which has the authority to audit anydecision by ANEEL that may impact public finance, initiated an administrativeproceeding against ANEEL to evaluate the criterion adopted by ANEEL in theEnergy Consumption Reduction Emergency Program (*ProgramaEmergencial de Redução de Consumo de Energia Elétrica*), orPERCEE.  The Federal Public AuditingCourt has asked us to provide certain information with respect to our rates,which, according to the Federal Public Auditing Court, were mistakenly approvedby ANEEL.  If we cannot provide supportfor these rates and ANEEL fails to confirm the legality of the criterionadopted, we may incur losses in the amount of R$83.2 million.  No reserve has been recognized in connectionwith this proceeding, as we believe we can provide the necessary support andthat ANEEL can confirm the legality of the rates.

 

In addition, the FederalPublic Auditing Court contested the index and the X Factor applied by ANEEL inour rate revision of 2003.  We have filedan administrative proceeding before the Federal Public Auditing Court tochallenge its decision.  We have notaccrued any liability related to this matter as we believe we have ameritorious defense.

 

We are also a defendant,together with the city of Belo Horizonte, in a lawsuit brought by a citizen ofBelo Horizonte, challenging the number of hours that CEMIG has charged the cityof Belo Horizonte for public lighting provided to the city during the past 20years.  We estimate the contingency to beapproximately R$62 million.  We have notaccrued any liability related to this claim because we believe that we have ameritorious defense.

 

**Dividend Policy and Payments**

 

*Obligatorydividend; priority and amount of dividends*

 

Under our bylaws, we arerequired to pay to our shareholders, as obligatory dividends, 50% of the netincome of the fiscal year ending December 31.  Our preferred shares have priority in theallocation of the obligatory dividend for the period in question.  The order of priority of the distribution ofdividends is as follows:

 

•      *The annual minimum dividend for the preferred shares:* Thesehave preference in the event of reimbursement of shares, and have an annualminimum dividend equal to the greater of the following:

 

•      10% of theirpar value; or

 

•      3% of theshareholders’ equity associated with it.

 

•      *The dividends on the common shares*, up to the minimumpercentage 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 or extraordinary, shall be paid in two equal installments,the first by June 30 and the second by December 30 of each year.

 

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.  Any interim dividends paid shall becalculated based on the dividend to be paid in the fiscal year in which theinterim dividend was declared.  Ourbylaws authorize our Board of Directors to declare interim dividends.  Any interim dividend paid may be set offagainst the amount of the obligatory dividend payable for the fiscal year inwhich the interim dividend was paid.

 

88

----

 

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.

 

*Amountsavailable for 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 any allocation to the legal reservein relation to any fiscal year in which the sum of the legal reserve and theother established capital reserves exceeds 30% of the company’s total paid-incapital.  Any net losses may be chargedagainst the legal 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 excess of our registeredcapital must be used to increase our registered capital or be distributed ascash dividends.

 

Under the BrazilianCorporate Law and our bylaws, dividends not claimed within three years from thedate on which they are distributed revert to us.

 

#### *Interest on capital*

#### * *

Under Brazilian law wemay pay interest on capital as an alternative for the distribution of funds toshareholders.  Funds distributed asinterest on capital qualify within the calculation of minimum dividendestablished in the bylaws.  These amountsmay be paid in cash; and the company may treat them as an expense for purposesof the calculation of the income tax and the social contribution tax.  The total amount paid in interest on capitalis limited to the result of application to the company’s shareholders’ equityof the Long Term Interest Rate (TJLP), published by the Brazilian DevelopmentBank (BNDES) and may not exceed the greater of (i) 50% of the netincome(before taxes for social contribution on net profits, income tax, and thededuction of the interest attributable to shareholders’ equity) for the periodin respect to which the payment is made or (ii) 50% of retained earningsas of the date of the beginning of the period in respect of which the paymentis made.   Shareholders who are notresident in Brazil must register with the Brazilian Central Bank so that theforeign currency proceeds of their dividend payments, or of sale or otheramounts relating to their shares, may be remitted to them outside Brazil.  The preferred shares underlying the company’sADRs are held in Brazil by the custodian bank, as agent for the depositarybank, which is the registered owner of the shares.

 

#### *Currency Exchange*

#### * *

Payments of cashdividends and distributions, if any, will be made in *reais*to the custodian on behalf of the depositary bank, which will then convert suchproceeds into U.S. dollars and will cause such U.S. dollars to be delivered tothe depositary bank for distribution to holders of ADRs.  In the event that the custodian is unable to

 

89

----

 

immediately convert the *reais* received as dividends into U.S. dollars, the amount ofU.S. dollars payable to holders of ADRs may be adversely affected bydevaluations of the *real* that occurbefore such dividends are converted and remitted.  The real appreciated approximately 7.94% relativeto the U.S. dollar in 2004.  See “Item3.  Key Information—Risk Factors—RisksRelating to Brazil.”  The Braziliangovernment exercises a significant influence on the Brazilian economy.  Political and economic conditions can have adirect impact on our business.”

 

Dividends in respect ofthe preferred shares paid to holders who are not Brazilian residents, includingholders of ADRs, are generally not subject to Brazilian withholding tax,although in general payments of interest on capital are subject to withholdingtax.  See “Item 10.  Additional Information—Taxation—Brazilian TaxConsiderations—Taxation of Dividends” and “—U.S. Tax Considerations—Taxation ofDistributions.”  There is no specificrecord date upon which the depositary bank will determine the exchange rate tobe used in connection with converting cash dividends or other cashdistributions.  Pursuant to the SecondAmended and Restated Deposit Agreement, the depositary bank will arrange forthe funds to be converted into U.S. dollars upon receipt of notice of cashdividends or other cash distributions.

 

*Historyof Dividend Payments*

 

The following table setsforth the recent history of declarations of dividends and interest on capitalon our common shares and preferred shares. For each year in the table, the payment of the dividends occurred duringthe year following declaration, except for 1998, when a portion of the totaldividend amount for that year was paid during the same year.  For the periods indicated, the dividends paidper 1,000 common shares and per 1,000 preferred shares were the same.  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)** | ** ** |
| 1998              |       | 243,991,371       |       | 169,459,096          |       | 314,001,295 |   | 218,083,022 |   |
| 1999              |       | 81,759,386        |       | 41,981,713           |       | 105,219,102 |   | 54,027,780 |   |
| 2000              |       | 81,768,792        |       | 30,590,644           |       | 105,231,208 |   | 39,368,203 |   |
| 2001              |       | 93,858,914        |       | 40,099,762           |       | 120,790,421 |   | 51,605,830 |   |
| 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(4)           |       | 302,634,209       |       | 119,476,593          |       | 389,766,059 |   | 153,875,270 |   |

 

----

(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 declared, 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.

 

(4)           The2004 dividends were approved at the annual and extraordinary generalshareholders’ meetings held on April 29, 2005.  The 2004 dividends are expected to be paid onJune 30, 2005 and December 29, 2005.  See note 18 to our consolidated financialstatements.

 

**SignificantChanges**

 

The most significantchange in our financial condition since the date of our financial statementsthat are included in this annual report on Form 20-F is a 23.88% rateincrease implemented in 2005, which has had a positive effect on ourelectricity sales revenues.  In order to comply withregulatory provisions pursuant to which we were required to unbundle ourvertically integrated businesses, we have incorporated two wholly-ownedsubsidiaries of CEMIG – Cemig Generation and Transmission and Cemig Distribution.

 

**Item9.****           ****The Offerand Listing**

 

90

----

 

**TradingMarket**

 

The principal tradingmarket for our preferred shares is the São Paulo Stock Exchange.  Our ADSs, each representing 1,000 preferredshares, have traded on the NYSE under the symbol “CIG” since September 18,2001.  Prior to that date, our ADSs weretraded in the over-the-counter, or OTC, market in the United States.  The ADSs are evidenced by ADRs issued byCitibank, N.A., as depositary, pursuant to a Second Amended and RestatedDeposit Agreement by and among us, the depositary and the holders andbeneficial owners of ADSs evidenced by ADRs issued thereunder.  As of December 31, 2004, there wereapproximately 14,530,135 ADSs outstanding, representing approximately 14,530billion preferred shares or approximately 16.4% of our 88,439 billionoutstanding preferred shares.  Such ADSswere held by 10 record holders as of that date. Our common shares are also listed and traded on the São Paulo StockExchange.

 

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) and the ADSson the NYSE for the periods indicated.

 
| ** **         | ** ** | **Preferred Shares(1)** | ** ** | **ADSs**         | ** ** |
|--------------------|------------|-------------------------|------------|------------------|------------|
| ** **         | ** ** | **Price in Nominal R$** | ** ** | **Price in US$** | ** ** |
| **Period**         | ** ** | **High**                | ** ** | **Low**          | ** ** | **High** | ** ** | **Low** | ** ** |
| 2000               |       | 40.50                   |       | 22.80            |       | — |   | — |   |
| 2001(2)            |       | 36.70                   |       | 21.00            |       | 18.62 |   | 8.40 |   |
| 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 |   |
|               |       |                    |       |             |       |   |   |   |   |
| 2003               |       |                    |       |             |       |   |   |   |   |
| First quarter      |       | 28.85                   |       | 21.40            |       | 8.75 |   | 6.06 |   |
| Second quarter     |       | 33.00                   |       | 25.50            |       | 11.28 |   | 7.92 |   |
| Third quarter      |       | 37.60                   |       | 24.82            |       | 13.41 |   | 8.22 |   |
| Fourth quarter     |       | 52.75                   |       | 33.60            |       | 18.46 |   | 12.05 |   |
|               |       |                    |       |             |       |   |   |   |   |
| 2004               |       |                    |       |             |       |   |   |   |   |
| First quarter      |       | 56.00                   |       | 46.95            |       | 19.99 |   | 16.55 |   |
| Second quarter     |       | 54.10                   |       | 36.80            |       | 18.72 |   | 11.42 |   |
| Third quarter      |       | 60.20                   |       | 46.10            |       | 21.25 |   | 15.30 |   |
| Fourth quarter     |       | 68.00                   |       | 60.40            |       | 25.10 |   | 21.07 |   |
| 2005               |       |                    |       |             |       |   |   |   |   |
| First quarter      |       | 68.20                   |       | 53.49            |       | 26.10 |   | 19.71 |   |
|               |       |                    |       |             |       |   |   |   |   |
| November 2004 |       | 65.58                   |       | 60.99            |       | 23.44 |   | 21.60 |   |
| December 2004 |       | 64.90                   |       | 63.60            |       | 25.10 |   | 22.74 |   |
| January 2005  |       | 68.00                   |       | 62.55            |       | 23.67 |   | 19.71 |   |
| February 2005 |       | 68.20                   |       | 55.55            |       | 26.10 |   | 21.55 |   |
| March 2005    |       | 66.85                   |       | 58.10            |       | 24.93 |   | 21.19 |   |
| April 2005    |       | 74.95                   |       | 61.71            |       | 29.80 |   | 23.40 |   |
| May 2005(3)   |       | 71.99                   |       | 65.60            |       | 29.11 |   | 26.61 |   |

 

----

(1)     Preferredshare prices and volumes per 1,000 preferred shares.

(2)     Fromthe listing on the NYSE on September 18, 2001 until the end of the period.

(3)     ThroughMay 18, 2005.

 

On May 18, 2005, theclosing price per 1,000 of the preferred shares on the São Paulo Stock Exchangewas R$70.95 and the closing price per ADS on the NYSE was US$28.55.

 

Since July 12, 2002,our depositary receipts, each representing 1,000 of our preferred shares, havetraded 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.

 

91

----

 

**Tradingon the São Paulo Stock Exchange**

 

The preferred shares aretraded on the São Paulo Stock Exchange, the only Brazilian stock exchange thattrades shares.  Trading on the São PauloStock Exchange is limited to member brokerage firms and a limited number ofauthorized non-members.  The CVM and SãoPaulo Stock Exchange have discretionary authority to suspend trading in sharesof a particular issuer under certain circumstances.

 

If you were to trade inthe preferred shares on the São Paulo Stock Exchange, your trade would settlein three business days after the trade date. Delivery of and payment for shares is made through the facilities of separateclearinghouses for each exchange, which maintain accounts for member brokeragefirms.  The seller is ordinarily requiredto deliver the shares to the exchange on the second business day following thetrade date.  The clearinghouse for the São PauloStock 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 theworld.  As of December 31, 2004, theaggregate market capitalization of the 358 companies listed on the São PauloStock Exchange was equivalent to approximately US$242 billion and the 10largest companies listed on the São Paulo Stock Exchange representedapproximately 67% of the total market capitalization of all listed companies.  Although any of the outstanding shares of alisted company may trade on a Brazilian stock exchange, in most cases fewerthan half of the listed shares are actually available for trading by thepublic.  The remainder of these shares isheld by small groups of controlling persons, governmental entities or oneprincipal shareholder.  As of December 31,2004, we accounted for approximately 1.55% 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 three years

 

We have been a member ofSpecial Corporate Governance Level 1 of the São Paulo Stock Exchange since October 2001.  As a result, we have agreed to do thefollowing:

 

•              maintaina free float of shares representing at least 25% of our capital stock;

 

•              providea minimum notice period of 15 days after calling any general shareholders’meeting;

 

•              improvethe scope of our quarterly financial information, by obligating ourselves toinclude consolidated financial statements and cash-flow statements with thisinformation;

 

•              complywith information disclosure rules for transactions involving securitiesthat we issue on behalf of our controlling shareholder or management;

 

•              discloseany shareholder agreements, stock option programs and contracts with relatedparties;

 

•              holdan annual meeting with analysts and any other interested parties;

 

•              makeavailable an annual calendar of corporate events; and

 

•              adoptmechanisms that favor capital dispersion in public share offerings.

 

Trading on Brazilianstock exchanges by non-residents of Brazil is subject to limitations underBrazilian foreign investment legislation. See “Item 10.  AdditionalInformation—Exchange Controls.”

 

92

----

 

**Regulationof Brazilian 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 (companhia aberta), suchas we are, or closely held (*companhia fechada*).  All publicly owned companies, including us,are registered with the CVM and are subject to reporting requirements.  Our shares are traded on the São Paulo StockExchange, but may be traded privately subject to certain limitations.  The Brazilian OTC market consists of directtrades and trades between individuals in which a financial institutionregistered 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 the initiative of the São Paulo StockExchange or the CVM based on or due to, among other reasons, a belief that acompany has provided inadequate information regarding a material event or hasprovided inadequate responses to inquiries by the CVM or the stock exchange.

 

Brazilian law providesgeneral restrictions on unfair trading practices and market manipulation,although in Brazil there may be fewer instances of enforcement actions andjudicial precedent is less well defined than in certain other countries.  The Brazilian Corporate Law provides that thecontrolling shareholders, any shareholder that appoints members to the board ofdirectors and to the fiscal council, members of the board of directors, membersof the fiscal council and executive officers will be required to disclose anypurchase or sale of shares to the CVM and the São Paulo Stock Exchange.

 

Trading on the São PauloStock Exchange by non-residents of Brazil is subject to limitations underBrazilian foreign investment and tax legislation.  The Brazilian custodian for the preferredshares and the depositary bank must obtain a certificate of registration fromthe Central Bank of Brazil to be eligible to remit U.S. dollars abroad forpayments of dividends, any other cash disbursements, or upon the disposition ofthe shares and sales proceeds thereof. In the event that a holder of ADSs exchanges its ADSs for preferredshares, the 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 toobtain and remit U.S. dollars abroad upon the disposition of the preferredshares, or distributions relating to the preferred shares, unless the holderqualifies for and obtains a new certificate of registration.  See “Item 10. Additional Information—Exchange Controls.”

 

# **Item 10.**         AdditionalInformation

# ** **

**CorporateGovernance Differences from NYSE Practices**

 

On November 4, 2003,the New York Stock Exchange (“NYSE”) established new corporate governancerules.  Under the rules, foreign privateissuers are subject to a more limited set of corporate governance requirementsthan U.S. domestic issuers.  Under theserules, we are required to set forth in our annual report to shareholders adescription of the significant differences between CEMIG’s corporate governancepractices and those that would apply to a U.S. domestic issuer under the NYSEcorporate governance rules.  Thefollowing table summarizes these differences.

 
| **Section** | ** ** | **NYSE  Corporate Governance Rule for U.S.  Domestic Issuers**                                                                                  | ** ** | **Our  Approach**                                                                                                                                                                                                                   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 303A.01     |       | A listed company must  have a majority of independent directors. “Controlled companies” are not  required to comply with this requirement. |       | CEMIG is a controlled  company because more than a majority of its voting power is controlled by the  government of the State of Minas Gerais. As a controlled company, CEMIG would  not be required to comply with the majority of |

 

93

----

 
| **Section**         | ** ** | **NYSE  Corporate Governance Rule for U.S.  Domestic Issuers**                                                                                                                                                                                                            | ** ** | **Our  Approach**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                           |       | 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 report its  findings to the shareholders. Because CEMIG has no audit committee, the  entire Board of Directors serves as CEMIG’s audit committee, as defined in  the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                                                                                                                                                       |

 

94

----

 

**By-laws**

 

We are a state-controlledcompany registered under the laws of Brazil. The registration number given to us by Junta Comercial do Estado deMinas Gerais, or the Board of Trade of Minas Gerais, is 3130004012.  Set forth below is a brief summary of certainsignificant provisions of (i) our by-laws, as amended by our extraordinaryshareholders’ meeting on December 13, 2004, and (ii) BrazilianCorporate Law.  The description of ourby-laws contained herein does not purport to be complete and is qualified byreference to our by-laws, which have been filed as an exhibit to this annualreport.

 

*Objectand Purpose*

 

As described in Article 1of our by-laws, we have four main purposes: (i) to construct and operateelectric power generation, transformation, transmission and distributionsystems and to trade electric power and related services; (ii) to developcommercial activities in the energy field; (iii) to render consultingservices to companies in Brazil and abroad; and (iv) to perform activitiesdirectly or indirectly relating to our corporate purposes.

 

*PreferredShares*

 

Holders of preferredshares have the right to receive annual minimum dividends in an amount equal tothe greater of 10% of the par value of each preferred share or 3% of theshareholders’ equity associated with each preferred share.  Holders of our preferred shares also willhave priority over any other class of shares if we decide to redeemshares.  A preferred share does notentitle its owner to vote at the general shareholders’ meetings.

 

*ShareSubscription*

 

Shares purchased by theState Government, which must constitute at all times the majority of our votingshares, 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 thedecision resulting from the general meeting of shareholders that addresses thematter.

 

Article 171 of theBrazilian Corporate Law provides that each shareholder has a general preemptiveright to subscribe for new shares or convertible securities issued in anycapital increase, in proportion to that shareholder’s shareholding, except inthe event of the exercise of any option to acquire shares of our capitalstock.  Shareholders must exercise theirpreemptive rights within 30 days after the publication of the notice of capitalincrease.

 

In the event of a capitalincrease, holders of ADSs, which represent preferred shares, would havepreemptive rights to subscribe only to newly issued preferred shares, inproportion to their shareholdings but may not be able to exercise these rightsbecause of U.S. securities law limitations. See “Item 3.  Risk Factors—RisksRelating to the Preferred Shares and ADSs—You may not be able to exercisepreemptive rights with respect to the preferred shares.”

 

*MinorityShareholders*

 

Our by-laws provide thatthe preferred and minority common shareholders are entitled to elect one memberand an alternate to the Board of Directors, as more fully described in “—Rightsof Shareholders—Rights of Minority Shareholders.”

 

*Dividends*

 

For a discussion of ourdividend policy, see “Item 8.  FinancialInformation—Dividend Policy and Payments.”

 

95

----

 

*GeneralMeetings*

 

General meetings ofshareholders are held for any legal purpose, as provided by the BrazilianCorporate Law.  Ordinary general meetingsof shareholders are held within the first four months of the fiscal year andare called upon 15 days prior notice. The Brazilian Corporate Law also provides that the following actions maybe taken only at extraordinary general meetings of shareholders held for thefollowing purposes:

 

•              toamend our by-laws;

 

•              toincrease or decrease our issued capital stock or to subscribe new shares;

 

•              toelect the members of the Board of Directors and of the Fiscal Council;

 

•              toissue debentures or any convertible securities;

 

•              tosuspend the rights of a shareholder who has violated the Brazilian CorporationLaw or our by-laws;

 

•              tomerge us with another company in a case in which we are not the survivingcompany (*incorporação* and *fusão*) or a spin-off (*cisão*);

 

•              toaccept or reject the valuation of in-kind contributions offered by ashareholder in consideration for the issuance of shares of our capital stock;

 

•              totransform us into a limited liability company (sociedade por quotas de responsabilidade limitada) or anyother corporate form;

 

•              totake any action regarding our dissolution or liquidation, and the appointmentand dismissal of the respective liquidator and review of the reports preparedby him or her;

 

•              totake any action regarding an application for bankruptcy or compulsory reschedulingof our debts; and

 

•              toreceive annually the financial statements from management and to approve thefinancial statements.

 

As a general rule, theaffirmative 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 affirmative vote of shareholdersrepresenting one half of our issued and outstanding voting capital is requiredto:

 

•              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;

 

96

----

 

•                                          spinoff a portion of our assets or liabilities;

 

•                                          approveour participation in a group of companies;

 

•                                          applyfor cancellation of our voluntary liquidation;

 

•                                          approveour dissolution; and

 

•                                          approvethe compulsory transfer of all of our shares to another company in order tomake us a wholly-owned subsidiary of that other company (*incorporação de ações*).

 

Shareholders may berepresented at a shareholders’ meeting by an attorney-in-fact appointed nolater than one year prior to the meeting date. To be eligible to represent a shareholder in a shareholders’ meeting,the attorney-in-fact must be a shareholder, one of our executive officers ordirectors or an attorney-at-law.  In apublicly held corporation, such as ours, the attorney-in-fact may also be afinancial institution.

 

Subject to the provisionsof the Brazilian Corporate Law and our by-laws, our Board of Directors mayordinarily call our shareholders’ meetings. These meetings may also be called by:

 

•                                          theFiscal Council, if the Board of Directors fails to call a general shareholders’meeting within one calendar month after the date it was required to do so underapplicable laws or a special shareholders’ meeting in the case of serious 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.

 

*Boardof Directors*

 

Our by-laws mandate thatour Board of Directors shall be comprised of 14 directors and 14alternates.  One director is designated achairman and another director is designated the vice-chairman.

 

Our Board of Directors isresponsible for:

 

•                                          establishingthe general direction of our business;

 

•                                          electingand dismissing executive officers;

 

•                                          approvingthe execution contracts between us and our shareholders or any entity thatcontrols, is controlled by or is under joint control with our shareholders;

 

•                                          approvingthe sale or pledge of our fixed assets, or the granting of guarantees to thirdparties, with a value of at least R$5 million;

 

•                                          approving,upon proposal by the Board of Executive Officers, the sale or the creation ofany “in rem” guarantees with respect to our permanent assets and the grantingby us of any personal guarantee to any third party in an amount exceeding R$5million;

 

•                                          approving,upon a proposal by the Board of Executive Officers, loans, financings,agreements and any actions which would bind us in an amount exceeding R$5million;

 

•                                          callingthe general meetings of shareholders;

 

97

----

 

•                                          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 the BrazilianCorporate Law, directors of a corporation generally have certain dutiesequivalent to those imposed under the laws of most states of the United States,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 andofficers may be held liable for breaches of duty to us and our shareholders andmay be subject to judicial actions in proceedings brought by governmentagencies or our shareholders.

 

There are no provisionsin our bylaws with respect to (i) a director’s power to vote on proposalsor contracts in which such director is materially interested, (ii) borrowingpowers exercisable by the directors, (iii) age limits for retirement ofboard members, and (iv) number of shares required for directorqualification.

 

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.  The vice-chairman of our Board of Directorswill act as a temporary replacement for our chairman when the chairman isabsent 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.  Our by-laws are in compliance with theBrazilian Corporate Law.

 

*EssentialRights*

 

Article 109 of theBrazilian Corporate Law provides that a corporation may not deny certain rightsto its shareholders under any circumstances. These shareholders’ rights include:

 

•              theright to have a share of the corporation’s earnings;

 

•              theright to have a share of the corporation’s assets, in the event of liquidationthereof;

 

•              theright to supervise our management according to the Brazilian Corporate Law;

 

98

----

•              preemptive rights to subscribe newshares or securities convertible into shares, except for exceptions provided bythe Brazilian Corporate Law and our by-laws; and

 

•              the right to withdraw from thecompany under certain circumstances provided in the Brazilian Corporate Law.

 

*VotingRights*

 

As a general rule, onlyour common shares are entitled to vote and each common share corresponds to onevote.  Holders of preferred sharesacquire voting rights if, during three consecutive fiscal years, we fail to paya fixed or minimum dividend to which the 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 rightof a holder of common shares or preferred shares to exercise voting rights withrespect to such shares by virtue of such holder being a non-resident of Brazilor a citizen of a country other than Brazil. However, holders of ADSs may only vote the underlying preferred sharesthrough the depositary according to the terms of the Second Amended andRestated Deposit Agreement.  In anycircumstance in which holders of preferred shares are entitled to vote, each preferredshare will entitle its holder to one vote.

 

*Redemption rights*

 

Our common shares andpreferred shares are not redeemable, except that a dissenting shareholder isentitled under Brazilian corporate law to obtain redemption upon a decisionmade at a shareholders’ meeting by shareholders representing at least 50% ofthe voting shares:

 

(1)           to create a new class of preferredshares or 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 the existingclasses of preferred shares;

 

(3)           to reduce the mandatory distributionof dividends;

 

(4)           to change our corporate purposes;

 

(5)           to merge us with another company orconsolidate us;

 

(6)           to transfer all of our shares toanother company in order to make us a wholly-owned subsidiary of such company;

 

(7)           to approve the acquisition of controlof another company at a price that exceeds certain limits set forth inBrazilian corporate law;

 

(8)           to approve our participation in acentralized group of companies as defined under Brazilian corporate law; or

 

(9)           in the event that the entityresulting from (a) a merger, (b) a transfer of shares as described inclause (6) above or (c) a spin-off that we conduct fails to become alisted company within 120 days of the general shareholders’ meeting at whichsuch decision was taken.

 

Only holders of sharesadversely affected by the changes mentioned in items (1) and (2) abovemay require us to redeem their shares. The right of redemption mentioned initems (5), (6) and (8) above may only be exercised if our shares donot satisfy certain tests of liquidity at the time of the shareholderresolution. The right of redemption

 

99

----

 

lapses 30 days afterpublication of the minutes of the relevant general shareholders’ meeting,unless, in the case of items (1) and (2) above, the resolution issubject to confirmation by the preferred shareholders (which must be made at aspecial meeting to be held within one year), in which case the 30-day term iscounted from the publication of the minutes of the special meeting.

 

We would be entitled toreconsider any action giving rise to redemption rights within 10 days followingthe expiration of such rights if the redemption of shares of dissentingshareholders would jeopardize our financial stability. Law No. 9,457 datedMay 5, 1997, which amended Brazilian corporate law, contains provisionswhich, among other provisions, restrict redemption rights in certain cases andallow companies to redeem their shares at their economic value, subject tocertain requirements. Our by-laws currently do not provide that our capitalstock will be redeemable at its economic value and, consequently, anyredemption pursuant to Brazilian corporate law would be made at no less thanthe book value per share, determined on the basis of the last balance sheetapproved by the shareholders; provided that if the general shareholders’meeting giving rise to redemption rights occurred more than 60 days after thedate of the last approved balance sheet, a shareholder would be entitled todemand that his or her shares be valued on the basis of a new balance sheetdated within 60 days of such general shareholders’ meeting.

 

*Rightsof Minority Shareholders*

 

The Brazilian CorporateLaw provides that shareholders who own at least 5% of the capital stock of acorporation are afforded the following rights, among others:

 

•              the right to require that thebooks of the corporation be made available for review, whenever theseshareholders become suspicious that Brazilian law or the corporation’s by-lawshave been violated, or that irregularities have been committed by themanagement of the corporation;

 

•              the right to call a generalmeeting of shareholders, under certain circumstances, whenever the corporation’sdirectors or officers, as the case may be, fail to do so; and

 

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

 

Whenever the FiscalCouncil is not permanently active, it shall be activated at a general meetingof shareholders at the request of shareholders who own at least 10% of thevoting shares or 5% of the non-voting shares. Minority shareholders have the right to appoint one member of the FiscalCouncil.  All shareholders have the rightto attend general meetings of shareholders.

 

The Brazilian CorporateLaw also provides that minority shareholders that hold either (i) preferredshares representing at least 10% of the total share capital of a company or (ii) commonshares representing at least 15% of the voting capital of a company, have theright to appoint one member and an alternate to the board of directors.  If no common or preferred shareholder meetsthese thresholds, shareholders holding preferred shares or common sharesrepresenting at least 10% of the total share capital of the company areentitled to combine their holdings to appoint one member and an alternate tothe board of directors. Through 2005, a director appointed by the preferredshareholders as a group, or collectively with the common shareholders, is to bechosen from a list of three names provided by the controlling shareholder.  Beginning with the annual general meeting of2006, this member of the Board of Directors will be elected in accordance withthe terms of the law, independently of the period of office of the board memberto be substituted.

 

*Changesin Rights of Shareholders*

 

Any change with respectto the rights of holders of our common shares or preferred shares requires ashareholders’ meeting.  Under theBrazilian Corporate Law, the proposed changes must be approved by a majority ofthe affected class.  Certain changes withrespect to the rights of non-voting shares, including preferred shares, such

 

100

----

 

as a change in payment orvoting rights, may give rise to the exercise of redemption rights by the holdersof the affected shares.

 

*GoingPrivate Transactions and Delisting from the São Paulo Stock Exchange*

 

Our delisting, as apublic company, must be preceded by a tender offer by our controllingshareholders or ourselves for the acquisition of all our then outstandingshares, subject to the conditions below:

 

•              the price offered for the sharesunder the public offering must be the fair value of those shares, asestablished in Brazilian Corporate Law; and

 

•              shareholders holding more than twothirds of our float shares shall have expressly agreed to our decision tobecome a private company or accepted the offer.

 

According to Brazilian corporate law, a fair price shall be at least beequal to our valuation, as determined by one or more of the following valuationmethods: book value, net book value assessed by market price, discounted cashflow, multiples, price of our shares in the market or any other valuationmethod accepted by the CVM. This price of the offer may be revised ifchallenged within 15 days of its publication by holders of at least 10% of ouroutstanding shares, by means of a request sent to our management that aextraordinary shareholders’ meeting be called to decide on whether to request anew 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 valuationis higher, the offeror will have the option to continue the offer with the newprice or quit the offer.

 

**Arbitration**

 

Pursuant to the BrazilianCorporate Law and related regulations, if provided for in a company’s by-laws,disputes among shareholders will be subject to arbitration.  Our by-laws currently do not provide forarbitration.

 

**MaterialContracts**

 

*CRCAccount Agreement - Contract for Assignment of Credit of the Remaining Balanceof the Revenue Compensating Account, dated May 31, 1995, between the StateGovernment and CEMIG, and Amendments thereto*

 

Prior to 1993, electricutilities in Brazil were guaranteed a rate of return on investments in assetsused to provide electric service to customers, the rates charged to customerswere uniform throughout the country, and profits from more profitable utilitieswere reallocated to less profitable ones so that the rate of return for allcompanies would equal the national average. Shortfalls experienced by most electric utilities in Brazil wereaccounted for in each company’s CRC Account. 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 our eligiblepayables and debt to the Federal Government had been offset against our CRCAccount balance, we entered into an agreement with the State Government in May 1995to transfer the right to receive the balance of our CRC Account from theFederal Government to the State Government in return for a promissory note fromthe State Government payable in monthly installments plus interest.  This account receivable had a balance ofapproximately R$2,942 million as of December 31, 2004, which included asignificant amount of overdue installments. The agreement relating to this transfer, the CRC Account Agreement,originally required the State Government to make monthly payments to us overtwenty years with an initial three-year grace period for interest and principalpayments.  Interest on the amountreceivable under the CRC Account Agreement accrues at a rate of 6% per yearplus inflation adjustments.  Interestbegan to accrue on May 2, 1995, and deferred interest during the initialthree-year grace period was capitalized.

 

Since May 1995, theCRC Account Agreement has been amended as follows:

 

101

----

 

(a)           The CRC Account Agreement was firstamended in February 2001 to replace the monetary restatement indexoriginally applicable to the outstanding balance with the IGP-DI.

 

(b)           The CRC Account Agreement was nextamended by the Second Amendment to the CRC Account Agreement, signed on October 14,2002, which refers to 149 monthly installment payments, with maturities from January 1,2003 through May 1, 2015, representing the total amount of R$1,845 millionof December 31, 2004, bearing interest at 6% per year, with restatementbased on the IGP-DI.  We entered intothis Second Amendment with the State Government in order to preserve the termsand conditions of the original CRC Account Agreement with respect to theabove-referenced installments.  We didnot receive any scheduled payments from the State Government with respect tothis Second Amendment.  In 2001, werecorded a full loss provision with respect to the entire outstanding balanceof the Second Amendment.  See Note 3 toour consolidated financial statements.

 

(c)           The CRC Account Agreement was nextamended by the Third Amendment to the CRC Account Agreement, signed on October 24,2002, which refers to outstanding installments originally due under the CRCAccount Agreement from April 1, 1999 through December 1, 1999 andfrom March 1, 2000 through December 1, 2002.  These installments, which totaled R$1,097million as of December 31, 2004, bear interest at an annual rate of 12%,with restatement based on the IGP-DI.  Weare permitted to retain payments of dividends and interest on capital due tothe State Government as our shareholder as a set-off against amounts that theState Government owes us under this Third Amendment.  For this reason, we have not recorded a lossprovision for amounts due thereunder.  We paid interest on capital in lieu ofdividends in December 2004, of which R$72 million was due to the StateGovernment.  Part of this intereston capital, amounting to R$49 million, was used by the State Government tosettle part of the CRC overdue credits and the remainder, in the amount of R$23million, to acquire debentures issued by CEMIG for the Irapé power plantconstruction.  See Note 3 to ourconsolidated financial statements.

 

(d)           On November 19,2004 our Board of Directors unanimously approved the main terms of a FourthAmendment to the CRC Account Agreement, which includes an increase from25% to 50% to the amount of dividends and interest due to the State that we areentitled to offset against amounts due under the CRC Account Agreement.  Under the terms approved by our Board of Directors, theoutstanding amount will bear interest at an annual rate of 10%, withrestatement based on the IGP-DI.  Thisamendment is still subject to approval by the State Government.  In addition to the agreement of the StateGovernment, execution of such amendment depends on the approval of ANEEL, ourshareholders and the state congress of the State of Minas Gerais.

 

*Contracton Concessions for Generating Electric Energy, dated July 10, 1997,between the Federal Government and CEMIG*

 

In order to provideelectric energy generation services to the public, we entered into a contractwith the Federal Government.  This concessioncontract establishes terms of the concessions for each of our generationplants.  Although the concessions fordifferent generation plants have different expiration dates, these concessionsare extendable by the Federal Government for a period of up to 20 years uponour application.  This contract grants usfree access to land in the public domain, certain rights of way, and existingtransmission and distribution systems so that we may transmit the energy producedin our generating stations.  In return,among other things, we must maintain a minimum level of regularity, continuity,efficiency and safety and we must set aside funds to account for fuelconsumption, use of water resources and contributions to the RGR.  We do not pay the Charge for Use of PublicAssets (*Uso do Bem Público)*,**orUBP, when generating under 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 a party to this contract, we serve apublic utility function and we must receive authorization from the FederalGovernment prior to entering into any other entrepreneurial 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.

 

*Contractfor Concessions of Electric Energy Transmission Services, dated July 10,1997, between the Federal Government and CEMIG*

 

102

----

 

In July 1997, weentered into a contract with the Federal Government authorizing us to provide ourelectric energy transmission services to the public until July 8,2015.  This contract also provides therates at which we may charge our customers 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 aregiven free access to land in the public domain and certain rights of way inorder to operate our electric energy transmission service.  In return, among other things, we mustmaintain adequate technology, equipment, facilities and operating methods toensure optimization of the use of existing and future electric energy resourcesand we must satisfy the demands of the electric energy market.  We are also required to enter into a transmissionservice agreement with the ONS, pursuant to which we must make the facilitiesof our transmission service available to the interconnected power system.

 

These contracts also provide that ANEEL or a substitute agency willsupervise us in the provision of our energy transmission services and that wewill be subject to penalties if we fail to comply with certain contractualprovisions.  The Federal Government mayintervene in our concession at any time in order to ensure that we areproviding our electric energy transmission services properly and that we arecomplying with this contract.

 

*Contracton Concessions for**Distributing**Electric Energy, dated July 10, 1997, betweenthe Federal Government and CEMIG*

 

To enable us to provideelectricity distribution service to the public, we have a concession contractwith the Brazilian Federal Government. This contract also provides for the rates at which we may charge clientsfor our services.We may apply for a 20-year extension of the period of thiscontract, and the Federal Government has the discretion to grant or refuse thisextension.

 

The contract gives us free access to land in 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 forour services are regulated by the concession-granting power, which grants: (i) anannual adjustment; and (ii) an overall review every five years. The lastfive-year review took place 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 apublic utility function and we must receive authorization from the FederalGovernment prior to entering into any other entrepreneurial 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.

 

*Contractfor the Supply and Exchange of Electricity, and Passthrough and Transport ofPower from Itaipu, dated 31 May 1993, between Furnas and CEMIG*

 

In 1993, we signed acontract with Furnas governing the supply and exchange of energy between Furnasand CEMIG, for a period of 10 years, and also the transfer of power and energygenerated by Itaipu, for a period of 20 years.

 

Since 1999, based on Law 9,648 of May 27, 1998,the portion relating to supply and exchange between Furnas and CEMIG has beenregulated by a specific contract, known as an “Initial Contract”.  See “—”Initial Contract” for Purchase andSale of Electricity, dated August 2, 2002, between Furnas and CEMIG.”

 

103

----

 

Since January 2003, Decree 4,550 of December 27,2002 has governed the sale of energy generated by Itaipu, appointing Eletrobrásas 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 executed with Furnas were required to beassigned to Eletrobrás.

 

*“Initial Contract” for Purchase andSale of Electricity, dated August 2, 2002, between Furnas and CEMIG*

 

The Initial Contract signed with Furnas in 2002governs the purchase by CEMIG of a portion of the electric energy generated byFurnas from the period from 1999 to the end of 2005.  The volumes contracted under such contractshall be gradually reduced 25% a year beginning at the end of 2002 inaccordance with Law 9,648/98.

 

*Shareholder’s Agreement, dated June 18,1997, between the State Government and Southern*

 

In 1999, after a new State Government administrationtook office, the State Government filed a lawsuit to nullify this shareholders’agreement on the grounds that it violated the state and federal constitutionsbecause the Special Quorum Provisions would constitute an unlawful transfer ofthe control of CEMIG to Southern. According to the lawsuit, state legislation would be required in orderfor the State Government to relinquish control of CEMIG to Southern.

 

After some preliminary decisions unfavorable to theState Government by the lower courts, in 1999 the State Government obtained aninjunction from the State Court of Appeals, which suspended the effects of theSpecial Quorum Provisions pending the result of the lawsuit.

 

InAugust 2001, the Minas Gerais State Court of Appeals rendered a decisiondeclaring the shareholders’ agreement null and void.  Given this decision, the voting rights as setforth in our by-laws, not those contained in the shareholders’ agreement, arecurrently in effect.  Our by-laws providethat each common share entitles the holder thereof to one vote at shareholders’meetings.  The by-laws do not provideSouthern with any extraordinary rights or privileges other than the rights itpossesses by virtue of its ownership of our common shares.  The decision of the State Court of Appealshas been appealed to a superior court, the Superior Tribunal de Justiça, and afinal decision, subject only to a request of amendment, was rendered in December 2003.  Therefore the effectiveness of theshareholders’ agreement and control of CEMIG remain subject to judicial challenge in the Supreme Court.

 

*IndentureCovering the First Public Issuance of Debentures, Divided into Two Series ofthe Same Class, Without Guarantee or Preference, of CEMIG, dated October 4,2001, between CEMIG and Planner Corretora de Valores S.A.*

 

On November 1, 2001,pursuant to an indentureentered into between us and Planner Corretora de Valores S.A, asfiduciary agent, we publicly issued R$625 million of debentures in two seriesof R$312.5 million each.  The firstseries of debentures will mature on November 1, 2009 and the second seriesof debentures will mature on November 1, 2011.  The debentures are subject to earlyredemption at the option of the debenture holders (in 2005 in the case of thefirst series and in 2006 in the case of the second series).  Upon maturity, we are obligated to pay to thedebenture holders an amount equal to the indexed par value of any debenturesstill outstanding plus compensatory interest. These debentures are not convertible and do not have preferences orguarantees.

 

Should we make a latepayment of any amount due to the debenture holders, we will have to pay, inaddition 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 amount due on a maturity date, therelated debentures must be accepted by us as payment by the debenture holdersfor electricity that we supply to them.

 

The proceeds from thisissuance 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.

 

104

----

 

At the General Meeting ofHolders of the Company’s First Issue of Non-convertible Debentures held on December 3,2004, the debenture holders approved an amendment to the indenture providingfor the compulsory exchange of the Company’s First Issue of Debentures fordebentures to be issued by Cemig Generation and Tranmission, in connection withthe implementation of the process of “unbundling” of the Company.  In addition, it was provided that thedebentures to be issued by Cemig Generation and Transmission will be guaranteedby CEMIG, the holding company.

 

*FinancingAgreements by Extension of Credit No. 02.2.962.3.1, dated February 7and No. 03.2.286.3.1 dated July 1 2003, between BNDES and CEMIG andIntervening Third Parties*

 

On February 7 and onJuly 1, 2003, we entered into two financing agreements pursuant to whichBNDES, upon satisfaction of certain conditions, extended two loans to us in theamounts of approximately R$396.7 million and R$176.5 million,respectively.  We borrowed R$335 millionpursuant to these agreements and used the proceeds to partially settle ouroutstanding obligations to the CCEE relating to spot market energy we purchasedduring the period of the Electricity Rationing Plan.  This financing was extended to us pursuant tothe terms of the General Agreement of the Electricity Sector.  The first loan is repayable to BNDES through60 monthly installments over five years, beginning March 15, 2003, withthe final payment due on February 15, 2008.  The second loan is repayable to BNDES through55 monthly installments over five years, beginning August 15, 2003, withthe final payment due on February 15, 2008.  Interest on the outstanding balance of bothfinancings accrues at a rate of 1% over the Sistema Especial de Liquidação eCustódia (Special System for Settlement and Custody) overnight rate, or SELIC,the Brazilian benchmark interest rate. We may prepay all or a part of the outstanding balance under theseagreements.

 

BNDES has agreed that as a result of theunbundling process, these contractswere assigned to Cemig Generation and Transmission.

 

Our obligations under these loans were originally guaranteed by therate revenue relating to electricity sales to final customers corresponding to3.27% (as defined in the first loan agreement) and 1.36% (as defined in thesecond loan agreement) of our monthly sales. As a consequence of the transferring of the debt to Cemig Generation andTransmission, since the revenue of Cemig Generation and Transmission is lower than thatof CEMIG entity that guaranteed the debt prior to the unbundling, the guaranteewas increased as follows: the loans will be guaranteed by the rate revenue of Cemig Generation andTransmission relating toelectricity sales to final customers corresponding to 9% (as defined in thefirst loan agreement) and 5% (as defined in the second loan agreement) of themonthly sales.

 

*SecuritiesDistribution Program*

 

We set up a Local NoteProgram, according to “Instrução CVM No. 400”, dated December 29,2003.  The Program is expected to lasttwo years from the date of the filing with the CVM, which occurred on July 19,2004.  Pursuant to the Program, we mayissue debentures of up to R$1.5 billion in a simplified process. The firstissuance under the Program is described below. See also “Item 5. Operating and Financial Review and Prospects—Liquidityand Capital Resources.

 

Because of theunbundling, we cannot issue additional debentures under the Program.  We may in the future establish other localnote programs directly or through our subsidiaries.

 

*Indenture Covering the ThirdPublic 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, weand Pavarini Distribuidora de Títulos e Valores Mobiliários, as fiduciaryagent, executedan indenture covering the public issuance of 40,000 debentures, in a totalamount of R$400 million.  The debenturesissued pursuant to this agreement are unsecured, not convertible intoshares, with a nominal unit value of R$10,000. On August 2,2004, a total of 23,042 debentures were subscribed and fully paid up,representing the total amount of R$230.4 million issued on June 1,2004.  The remaining debentures, whichwere not subscribed, were cancelled.  Thedebentures will mature on the first business day of June 2014.  Upon maturity, we are obligated to pay to thedebenture holders an amount equal to the indexed outstanding par value of thedebentures plus interest.

 

105

----

 

In connection with the unbundling process, the indentureprovides for the mandatory exchange of the debentures issued by CEMIGfor debentures to be issued by CemigDistribution.  In addition, itprovides that the debentures to be issued by Cemig Distribution will be guaranteed by CEMIG, as the holdingcompany.

 

The proceeds from thisissuance were used to roll over part of the debt raised to finance investmentsin the distribution segment.

 

*Initial Contract between**Cemig Generation and Transmission**and Cemig Distribution*

 

Asa result of the process of unbundling, Cemig Generation and Transmission andCemig Distribution were required to sign a power purchase agreement under theterms of the Law 9,648/98, referred to as the Initial Contract, correspondingto 866 average MW, or 25% of the capacity owned by Cemig Generation andTransmission. The agreement is expected to terminate at the end of 2005 and theenergy price was established by ANEEL in compliance with the terms of theabove-mentioned Law.

 

*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 new regulations, the distributorsmust buy energy, to serve their markets, through public auctions in theregulated environment, in which the CCEARs are signed.  In December 2004, thefirst electricity auction under the new model for the electricity sector washeld.  In this auction Cemig Distributionand Cemig Generation and Transmission made electricity purchase and salecontracts.

 

CemigDistribution purchased, to serve its market, 530 average MW in contracts withterms of eight years, with the supply starting on January 1, 2005, at an average price of R$57.51/MWh, and 919 average MW incontracts with terms of eight years with the supply starting on January 1, 2006 at an average price of R$67.33 MWh.  The contracts were signed with 12 companiesholding generation concessions, including Cemig Generation and Transmission.

 

In the same auction CemigGeneration and Transmission sold 927 average MW in contracts with terms ofeight years, with the supply beginning on January 1,2006.  The sale price of the electricityis R$69.58/MWh, referring to January 2005. The contracts were signed with 35 distributors, including CemigDistribution, which serve consumers in all the regions of the Braziliannational grid system.

 

In April 2005, thesecond electricity auction under the new model for the electricity sector washeld.  In this auction Cemig Distributionand Cemig Generation and Transmission executed CCEARs.  Cemig Distribution purchased, to serve its market,105 average MW in contracts with terms of eight years, with the supply startingon January 1, 2008, at an average price of R$83.13/MWh. The contracts weresigned with ten companies holding generation concessions, including CemigGeneration and Transmission. In the same auction Cemig Generation andTransmission sold 105 average MW in contracts with terms of eight years, withthe supply beginning on January 1, 2008. The sale price of the electricity is R$83.50/MWh, referring to April 2005.The contracts were signed with 34 distributors, including Cemig Distribution,which serve consumers in all the regions of the Brazilian national grid system

 

*Contractsfor Sale of Energy to Free Consumers*

 

CemigGeneration and Transmission sold, through “bilateral” contracts, powercapacity averaging approximately 1,900 MW to a wide range of Free Consumers,the majority of them being in the State of Minas Gerais, under contracts withterms between six and ten years.  Theaverage price of these transactions for the year 2005 is around R$70/MWh.  In 2010, as some of these contracts expire,there will be a reduction of approximately 600 MW in the amount contracted,especially with large clients such as Usiminas, Cosipa and White Martins.  Our expectation is that these contracts willbe renewed 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.

 

106

----

 

Under these contractsthere is flexibility for variations in the clients’ consumption of energy.  There is a possibility that the amount soldmay be lower than the amount contracted for due to the “take or pay” clauses,or that the amount sold may even be larger than the amount contracted for dueto the clause covering levels in excess of the amount contracted.  The revenue of Cemig Generation and Transmission mayvary due to this contractual flexibility.

 

*Gasmig Shareholders Agreement andAssociation Agreement*

 

As a condition to the investment of Petrobras in Gasmig, weand Petrobras entered into 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$1.5 million.  Under the terms ofthe Gasmig Shareholders Agreement, our ability to transfer our shares in Gasmigis limited, and Petrobras shall have a right of first refusal in any futuretransfer of shares.  As a result of thisShareholders Agreement, our ability to manage Gasmig was considerably reduced.

 

On December 15,2004, CEMIG sold part of its shares in Gasmig, corresponding to 40% of theregistered capital, 0.5% to Gaspetro and 39.5% to its subsidiary, TSSParticipações 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 operational revenue.

 

Gasmig is not a consolidated subsidiary in our financialstatements as of the year ended December 31, 2004, in accordance with theFASB’s EITF Issue No. 96-16, “Investor’s Accounting for an Investee Whenthe Investor Has a Majority of the Voting Interest but the Minority Shareholderor 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 the resultof the Association Agreement between CEMIG, Gasmig, Gaspetro and Petrobrassigned on August 25, 2004, the purpose of which is to develop the marketfor natural gas throughout the State of Minas Gerais. Under the agreement, aGuidelines Plan specifies the markets to be served, the investment to be madeby Petrobras and its subsidiaries in gas pipelines and the investment to bemade by Gasmig in expansion of the gas distribution networks.

 

This capital investmentwill increase the volume of gas sold from its present level of 3.5 millionm3/day to 4.5 million m3/day at the end of 2006, and 11.1 million m3/day in2023.

 

*Agreementbetween CEMIG and companies in the New Agreement of the Electric Sector*

 

Resolution No. 91 ofthe Electricity Crisis Management Chamber (Câmara de Gestão da Crise de EnergiaElétrica), or GCE, of December 21, 2001, and Law 10,438 of April 26,2002, established the procedures for implementing the General Agreement for theElectricity Sector, which came into force on December 27, 2001, andresulted in the repayment by consumers of losses incurred by distributors andgenerators during the period of rationing of 2001-2002.  These repayments are referred to as anextraordinary rate readjustment, or RTE (Recomposição TarifáriaExtraordinária).  The RTEs became part ofthe assets of the companies, and are amortized through “extraordinary revenue”.  See note 4 to our consolidated financialstatements.

 

A condition to receipt of the RTE is that the recipient must not to beinvolved in any lawsuit with ANEEL that questions the RTE or any relatedregulation.  As CEMIG has contested theclearance process at the CCEE, ANEEL issued an order to suspend the payment ofthe RTE to CEMIG.

 

CEMIG executed a settlementagreement with ANEEL, the CCEE and the CCEE participants, to settle thelawsuit CEMIG filed to contest the procedures used by the CCEE during thesettlement process.  As a condition to the agreement,CEMIG withdrew its lawsuit against ANEEL. As a result of this agreement, ANEEL will revoke the ruling thatsuspended the payment of the RTE to our distribution subsidiary, which willresult in a payment of approximately R$140 million to CEMIG.  CEMIG agreed to repay the other CCEEparticipants the outstanding amounts that ANEEL calculated as being due byCEMIG during the settlement process held by the CCEE between

 

107

----

 

September 2002 and January 2003.  The calculation of the exact amount due to eachof the participants of the CCEE will be made by the CCEE, and such amount willbe paid in up to 50 installments, depending on the total amount due to each creditor and will be indexedto the SELIC interest rate plus a spread of 1%.  Wehave accrued a liability of R$142.6 million related to this matter.  See “Item 8. Financial Information — LegalProceedings — Regulatory Matters.”

 

**ExchangeControls**

 

There are no restrictionson the ownership of preferred shares by legal entities domiciled outsideBrazil.  However, your right to convertdividend payments and proceeds from the sale of preferred shares into foreigncurrency and to remit such amounts outside Brazil is subject to restrictionsunder foreign investment legislation which generally requires, among otherthings, that you register the relevant investment with the Central Bank and theCVM.

 

Investments in the preferredshares through the holding of 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.  Directinvestments in the preferred shares upon the cancellation of the ADSs may beheld by foreign investors under Law No. 4,131 of September 3, 1962 orResolution No. 2,689 of the National Monetary Council, both of whicheffectively allow registered foreign investors to invest substantially in anycapital market instrument in Brazil and extend a favorable tax treatment to allforeign investors registered and qualified under Resolution No. 2,689, whoare not resident in a tax haven, as defined by Brazilian tax laws.

 

Under Resolution No. 2,689,foreign investors may invest in almost all financial assets and engage inalmost all transactions available in the Brazilian financial and capitalmarkets, provided that certain requirements are fulfilled.  In accordance with Resolution No. 2,689,the definition of foreign investor includes individuals, legal entities, mutualfunds and other collective investment entities that are domiciled orheadquartered abroad.

 

Securities and otherfinancial assets held by Resolution No. 2,689 investors must be registeredor maintained in deposit accounts or in the custody of an entity duly licensedby the Central Bank or the CVM.  Inaddition, any transfer of a security that is held pursuant to Resolution No. 2,689must be made through the stock exchanges or organized OTC markets licensed bythe CVM, except for a transfer resulting from a corporate reorganizationoutside of Brazil or occurring upon the death of a foreign investor byoperation of law or will.

 

Holders of ADSs who havenot registered their investment with the Central Bank could be adverselyaffected by delays in, or refusals to grant, any required government approvalfor conversions of payments made in *reais*and remittances abroad of these converted amounts.

 

The Annex V Regulationsprovide for the issuance of depositary receipts in foreign markets in respectof shares of Brazilian issuers.  The ADSshave been approved under the Annex V Regulations by the Central Bank and theCVM.

 

An electronic certificateof registration has been issued in the name of Citibank, N.A., the depositarybank, with respect to the ADSs and is maintained by Citibank Distribuidora deTítulos e Valores Mobiliários S.A., the Brazilian custodian for the preferredshares, on behalf of the depositary bank. This electronic certificate of registration is registered through theCentral Bank Information System. Pursuant to the certificate of registration, the custodian and thedepositary bank are able to convert dividends and other distributions or salesproceeds with respect to the preferred shares represented by ADSs into foreigncurrency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for preferredshares, the 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 toconvert into foreign currency and remit outside Brazil the proceeds from thedisposition of, or distributions with respect to, the preferred shares, unlessthe holder is a duly qualified investor under Resolution No. 2,689 byregistering with the CVM and the Central Bank and appointing a representativein Brazil.  If not so registered, theholder will be subject to less favorable Brazilian tax treatment than a holderof ADSs.  Regardless of qualificationunder Resolution No. 2,689, residents in tax havens are subject to lessfavorable tax treatment than other foreign investors.  See “—Taxation—Brazilian Tax Considerations.”

 

108

----

 

Under current Brazilianlegislation, the Federal Government may impose temporary restrictions offoreign capital abroad in the event of a serious imbalance or an anticipatedserious imbalance of Brazil’s balance of payments.  For approximately nine months in 1989 and early1990, the Federal Government froze all dividend and capital repatriations heldby the Central Bank that were owed to foreign equity investors, in order toconserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with FederalGovernment directives.  We cannot assureyou that the Federal Government will not impose similar restrictions on foreignreparations in the future.

 

**Taxation**

 

The following summarycontains a description of the material Brazilian and U.S. federal income taxconsequences of the purchase, ownership and disposition of preferred shares orADSs by a U.S. person, as defined in the Internal Revenue Code of 1986, or theCode, or a holder that otherwise will be subject to U.S. federal income tax ona net income basis in respect of preferred shares or ADSs, which we refer to asa U.S. holder, but it does not purport to be a comprehensive description of allof the tax considerations that may be relevant to a decision to purchasepreferred shares or ADSs.  In particularthis summary deals only with U.S. holders that will hold preferred shares orADSs as capital assets and does not address the tax treatment of U.S. holdersthat own or are treated as owning 10% or more of the voting shares of theCompany or that may be subject to special tax rules, such as banks, insurancecompanies, dealers in securities or currencies, persons that will holdpreferred shares or ADSs as a position in a “straddle” or a “conversiontransaction” for tax purposes, and persons that have a “functional currency”other than the U.S. dollar.

 

The summary is based upontax laws of Brazil and the United States as in effect on the date hereof whichare subject to change possibly with retroactive effect.  Prospective purchasers of ADSs should consulttheir own tax advisors as to the Brazilian, U.S. or other tax consequences ofthe purchase, ownership and disposition of preferred shares or ADSs, including,in particular, the effect of any foreign, state or local tax laws.

 

Although there is atpresent no income tax treaty between Brazil and the United States, the taxauthorities of the two countries have had discussions that may culminate insuch a treaty.  No assurance can begiven, however, as to whether or when a treaty will enter into force or how itwill affect the U.S. holders of preferred shares or ADSs.

 

*BrazilianTax Considerations*

 

*General*.  The following discussion summarizes theprincipal Brazilian tax consequences of the acquisition, ownership anddisposition of preferred shares or 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 thecase of a holder of preferred shares, we assume the investment is registeredwith the Central Bank.  The followingdiscussion does not address all of the Brazilian tax considerations applicableto any particular non-Brazilian holder. Therefore, each non-Brazilian holder should consult his or her own taxadviser concerning the Brazilian tax consequences of an investment in ourpreferred shares or ADSs.

 

*Taxationof Dividends*. Dividends paid by us, including stock dividends and other dividends paidin property to the depositary in respect of the preferred shares, or to anon-Brazilian holder in respect of the preferred shares, are currently notsubject to withholding tax in Brazil to the extent that the dividends relate toprofits for periods beginning on or after January 1, 1996.  Dividends relating to profits generated priorto January 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 of December 26, 1995, as amended,permits Brazilian corporations to make distributions to shareholders ofinterest on capital, or interest attributed to shareholders’ equity.  These distributions may be paid in cash.  A company may treat these payments as anexpense for income tax and social contribution purposes.  This interest is limited to the daily prorata variation of the Federal Government’s long-term interest rate, asdetermined by the Central Bank from time to time, and cannot exceed the greaterof:

 

109

----

 

•              50% of net income (before taxesfor social contribution on net profits, income tax, and the deduction of theinterest attributable to shareholders’ equity) for the period in respect ofwhich the payment is made; or

 

•              50% of retained earnings as of thedate of the beginning of the period in respect of which the payment is made.

 

Any payment of intereston capital to shareholders (including holders of ADSs in respect of preferredshares) is subject to a withholding tax at a rate of 15%, or 25% in the case ofa shareholder domiciled in a tax haven. These payments may be included, at their net value, as part of anymandatory 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.

 

If we distribute intereston capital, distributions to non-Brazilians of interest attributed toshareholders’ equity in respect of preferred shares, including the preferredshares underlying the ADSs, may be converted into U.S. dollars and remittedoutside Brazil, subject to applicable exchange controls.

 

We cannot assure you thatour Board of Directors will not determine that future distributions should bemade by means of interest on capital.

 

*Taxationof Gains*.  Pursuant to Article 26of Law No. 10,833, published on December 29, 2003, the sale ofproperty located in Brazil involving non-resident investors could be subject toBrazilian income tax as of February 1, 2004.  Our understanding is that ADSs do not qualifyas property located in Brazil.  Insofaras the regulatory norm referred to in Article 26 is recent and generic andhas not been tested through the administrative or judicial courts, we areunable to evaluate what the final ruling on the matter will be.

 

Capital gains earned byresidents of low-tax jurisdictions are subject to a 25% withholding tax rate.

 

For purposes of Braziliantaxation, there are two types of non-Brazilian holders of ADSs or preferredshares:

 

•              market investors, which representthose non-Brazilian residents who register with the Central Bank and the CVM toinvest in Brazil, in accordance with Resolution No. 2,689 of the NationalMonetary Council, or those investors holding ADSs; Non-residents domiciled inlow-tax jurisdictions are expressly excluded from this mechanism and,therefore, are subject to the same treatment applicable to ordinarynon-Brazilian holders; and

 

•              ordinary non-Brazilian holders,which include any and all non-residents in Brazil who invest in the countrythrough any other means; and residents of low-tax jurisdictions.

 

The comments containedbelow are applicable to all non-Brazilian holders, including non-Brazilian holdersinvesting under Resolution No. 2,689, except where otherwise noted.

 

Resolution No. 2,689effectively extends the favorable tax treatment currently afforded to holdersof ADSs (except those residing in low-tax jurisdictions, as mentioned above) toall non-Brazilian holders of preferred shares that have:

 

•              appointed a representative inBrazil with powers to take action relating to their investment;

 

•              appointed an authorized custodianin Brazil for their investments;

 

•              registered as a foreign investorwith the CVM; and

 

110

----

 

•              registered their investment withthe Central Bank.

 

The deposit of preferredshares in exchange for the ADSs may be subject to Brazilian income tax oncapital gains if the amount previously registered with the Central Bank as aforeign investment in preferred shares or, in the case of other marketinvestors under Resolution No. 2,689, the acquisition cost of thepreferred shares, as the case may be, is lower than:

 

•              the average price per preferredshare on the Brazilian stock exchange on which the greatest number of suchshares were sold on the day of deposit; or

 

•              if no preferred shares were soldon that day, the average price on the Brazilian stock exchange on which thegreatest number of preferred shares were sold during the 15 preceding tradingsessions.

 

The difference betweenthe amount previously registered, or the acquisition cost, as the case may be,and the average price of the preferred shares, calculated as set forth above,is considered a capital gain subject to income tax at a rate of 15%.

 

The withdrawal ofpreferred shares in exchange for the ADSs is not subject to any Braziliantax.  On receipt of the underlyingpreferred shares, the non-Brazilian holder will be entitled to register theU.S. dollar value of the shares with the Central Bank.

 

As mentioned above, as ofFebruary 1, 2004, the sale of property located in Brazil involvingnon-resident investors could be subject to Brazilian income tax.  Our understanding is that ADSs do not qualifyas property located in Brazil.  Insofaras the regulatory norm referred to in Article 26 is recent and generic andhas not been tested through the administrative or judicial courts, we areunable to evaluate what the final ruling on the matter will be.  Beneficiaries resident of tax havens aresubject to the increased 25% withholding tax rate on capital gains.

 

With reference toproceeds of a redemption of, or a liquidating distribution with respect to,preferred shares, the difference between the amount effectively received by theshareholder and the amount of foreign currency registered with the Central Banktranslated into *reais* at the commercial marketrate on the date of the redemption or liquidating distribution, will be treatedas a capital gain derived from sale or exchange not carried out on a Brazilianstock exchange and will be subject to income tax at a rate of 15%.

 

Non-Brazilian holders aresubject to a withholding tax rate of 15% on gains realized on:

 

•              sales or exchanges of thepreferred shares in Brazil; or

 

•              sales of the preferred shares to aresident of Brazil outside of a Brazilian stock exchange.

 

Non-Brazilian holders arecurrently subject to an income tax at a rate of 15%, as of January 1,2005, on gains realized on the sale or exchange in Brazil of preferredshares that occur on a Brazilian stock exchange, unless the sale is made by anon-Brazilian holder that is not resident in a tax haven jurisdiction (i) withinfive business days of the withdrawal of the preferred shares in exchange forADSs, and the proceeds are remitted abroad within the same five-day period; or (ii) thatis an investor under Resolution No. 2,689. In these two cases, the gains realized would be exempt from this incometax.

 

The “gain realized” as aresult of a transaction on a Brazilian stock exchange is the difference betweenthe amount in *reais* realized onthe sale or exchange and the acquisition cost measured in *reais*,without any correction for inflation. The acquisition cost of shares registered as an investment with theCentral Bank is calculated on the basis of the foreign currency amountregistered with the Central Bank translated into *reais* at the commercial market rate on the date of the saleor exchange.  We cannot assure you thatthe current preferential treatment for holders of the ADSs and non-Brazilianholders of our preferred shares under Resolution No. 2,689 will continuein the future.

 

As of January 1, 2005 the purchase price of preferredshares sold on the Brazilian stock exchange is subject to a withholding taxrate of 0.005%, except in case of non-Brazilian holders, which invest in Brazilpursuant to

 

111

----

 

Resolution No. 2,689. This tax may be offset against the 15% income tax due on the gainsrealized upon the sale of the shares.

 

Any exercise ofpreemptive rights relating to the preferred shares will not be subject toBrazilian taxation.  Conversely, any gainon the sale or assignment of preemptive rights relating to the preferred sharesby the depositary on behalf of the holders of ADSs or by a non-Brazilian holderof preferred shares will be subject to the same rules of taxationapplicable to the sale or assignment of preferred shares.  The maximum rate is currently 15%.

 

*BeneficiariesResiding or Domiciled in Tax Havens or Low-Tax Jurisdictions*.  Law No. 9,779, dated as of January 19,1999, states that, except under limited circumstances, any income derived fromoperations by a beneficiary that resides or is domiciled in a countryconsidered to be a tax haven is subject to income tax to be withheld by thesource at a rate of 25%.

 

Accordingly, if thedistribution 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 for capital gains paid to residents oflow-tax jurisdictions as of February 2004.

 

In accordance with Law No. 9,959,non-Brazilian holders of ADSs or preferred shares which are resident in taxhavens are 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.

 

*Taxationof Foreign Exchange Transactions*.  A financial transaction tax is imposed on theconversion of *reais* into foreigncurrency and on the conversion of foreign currency into *reais*. Although the current applicable rate for almost all foreign currencyexchange transactions is zero, the Ministry of Finance may increase the rate atany time, up to 25%.  However, it mayonly do 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, or IOF, which may be imposedon any transaction involving bonds and securities, even if the transactionincludes Brazilian stock, futures or commodities exchanges.  The rate of IOF/Títulos with respect totransactions of preferred shares and ADSs is currently zero, although theexecutive branch may increase the rate up to 1.5% per day of the terms of thesecurities, but only with respect to future preferred shares and ADSs transactions.

 

*OtherBrazilian Taxe*s.  Thereare no Brazilian inheritance, gift or succession taxes applicable to theownership, transfer or disposition of preferred shares or ADSs, except for giftand inheritance taxes imposed by some Brazilian states on gifts or bequests byindividuals or entities not domiciled or residing in Brazil to individuals orentities domiciled or residing within such states.  There are no Brazilian stamp, issue,registration, or similar taxes or duties payable by holders of preferred sharesor ADSs.

 

CPMF tax has generallybeen imposed on bank account debits, initially at a rate of 0.38%.  Constitutional Amendment No. 42/2003approved the continued imposition of the CPMF tax until December 31, 2007at the rate of 0.38%. The responsibility for the collection of the CPMF tax isborne by the financial institution that carries out the relevant financialtransaction.  Additionally, when thenon-Brazilian holder transfers the proceeds from the sale or assignment ofpreferred 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 inconnection with ADSs or preferred shares, we will bear the CPMF tax.

 

Non-Brazilian holders investing in the Brazilian stockexchange are granted a CPMF exemption upon the entrance of funds into Braziland the remittance abroad.

 

*U.S.Tax Considerations*

 

In general, for U.S.federal income tax purposes, holders of ADRs evidencing ADSs will be treated asthe beneficial owners of the preferred shares represented by those ADSs.

 

112

----

 

*Taxationof Distributions*. Distributions with respect to the preferred shares or the ADSs (otherthan distributions in redemption of the preferred shares subject to Section 302(b) ofthe Code or in a liquidation of the Company) will, to the extent made fromcurrent or accumulated earnings and profits of the Company as determined underU.S. federal income tax principles, constitute dividends.  Whether such current or accumulated earningsand profits will be sufficient for all such distributions on the preferredshares or ADSs to qualify as dividends for U.S. federal income tax purposesdepends on the future profitability of the Company and other factors, many ofwhich are beyond the control of the Company. To the extent that such a distribution exceeds the amount of the Company’searnings and profits, it will be treated as a non-taxable return of capital tothe extent of the U.S. holder’s basis in the preferred shares or ADSs, andthereafter as capital gain (provided that the preferred shares or ADSs are heldas capital assets).  As used below, theterm “dividend” means a distribution that constitutes a dividend for U.S.federal income tax purposes.  Cashdividends (including amounts withheld in respect of Brazilian taxes) paid withrespect to (i) the preferred shares generally will be includible in thegross income of a U.S. holder as ordinary income on the day on which thedividends are received by the U.S. holder or (ii) the preferred sharesrepresented by ADSs generally will be includible in the gross income of a U.S.holder as ordinary income on the day on which the dividends are received by thedepositary bank and, in either case, will not be eligible for the dividendsreceived deduction allowed to corporations. Dividends paid in *reais* will beincludible in the income of a U.S. holder in a U.S. dollar amount calculated byreference to the exchange rate in effect on the day they are received by theU.S. holder, in the case of preferred shares, or the depositary bank, in thecase of preferred shares represented by ADSs.

 

If dividends paid in *reais* are converted into U.S. dollars onthe day they are received by the U.S. holder or the depositary bank, as thecase may be, U.S. holders generally should not be required to recognize foreigncurrency gain or loss in respect of the dividend income.  U.S. holders should consult their own taxadvisors regarding the treatment of any foreign currency gain or loss if any *reais* received by the U.S. holder or thedepositary bank are not converted into U.S. dollars on the date of receipt, aswell as the tax consequences of the receipt of any additional *reais* from the custodian on account of Brazilian inflation.

 

Dividends generally willconstitute foreign source “passive income” or financial services income forU.S. foreign tax credit purposes.  In theevent Brazilian withholding taxes are imposed on such dividends, such taxes maybe treated as a foreign income tax eligible, subject to generally applicablelimitations and conditions under U.S. federal income tax law, for creditagainst a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’selection, may be deducted in computing taxable income).  The calculation and availability of foreigntax credits and, in the case of a U.S. holder that elects to deduct foreigntaxes, the availability of deductions, involves the application of rules thatdepend on a U.S. holder’s particular circumstances.  In the event Brazilian withholding taxes areimposed, U.S. holders should consult their own tax advisors regarding theavailability of foreign tax credits with respect to Brazilian withholdingtaxes.

 

It is not entirely clearwhether the preferred shares will be treated as “preferred stock” or “commonstock” within the meaning of section 305 of the Code.  If the preferred shares are treated as “commonstock” for purposes of section 305, distributions to U.S. holders ofadditional shares of such “common stock” or preemptive rights relating to such “commonstock” with respect to their preferred shares or ADSs that are made as part ofa pro rata distribution to all shareholders of the Company generally will notbe treated as dividend income for U.S. federal income tax purposes, but couldresult in additional U.S.-source taxable gain upon the sale of such additionalshares or preemptive rights.  On theother hand, 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 thatevent, the amount of such distribution (and the basis of the new shares orpreemptive rights so received) generally will equal the fair market value ofthe shares or preemptive rights on the date of distribution.

 

A holder of preferredshares or ADSs that is not a U.S. holder generally will not be subject to U.S.federal income or withholding tax on dividends received on preferred shares orADSs, unless such income is effectively connected with the conduct by theholder of a trade or business in the United States.

 

*QualifiedDividend Income*. Notwithstanding the foregoing, certain dividends received by individualU.S. holders that constitute “qualified dividend income” will be subject to areduced maximum marginal U.S. federal

 

113

----

 

income tax rate.  Qualified dividend income generally includes,among other dividends, dividends received during the taxable year from “qualifiedforeign corporations.”  In general, aforeign corporation is treated as a qualified foreign corporation with respectto any dividend paid by the corporation with respect to stock of thecorporation that is readily tradable on an established securities market in theUnited States.  For this purpose, a shareis treated as readily tradable on an established securities market in theUnited States if an ADR backed by such share is so traded.

 

Notwithstanding thisprevious rule, dividends received from a foreign corporation that is a passiveforeign investment company (as defined in section 1297 of the Code), or ineither the taxable year of the corporation in which the dividend was paid orthe preceding taxable year will not constitute qualified dividend income.  In addition, the term “qualified dividendincome” will not include, among other dividends, any (i) dividends on anyshare of stock or ADS which is held by a taxpayer for 60 days or less duringthe 120-day period beginning on the date which is 60 days before the date onwhich such share or the shares backing the ADS become ex-dividend with respectto such dividends (as measured under section 246(c) of the Code) or (ii) dividendsto the extent that the taxpayer is under an obligation (whether pursuant to ashort sale or otherwise) to make related payments with respects to positions insubstantially similar or related property. Moreover, special rules apply in determining a taxpayer’s foreigntax credit limitation under section 904 of the Code in the case ofqualified dividend income.

 

Individual U.S. holdersshould consult their own tax advisors to determine whether or not amountsreceived as dividends from us will constitute qualified dividend income subjectto a reduced maximum marginal U.S. federal income tax rate and, in such case,the effect, if any, on the individual U.S. holder’s foreign tax credit.

 

*Taxationof Capital Gains*. Deposits and withdrawals of preferred shares by U.S. holders in exchangefor ADSs will not result in the realization of gain or loss for U.S. federalincome tax purposes.

 

Gain or loss realized bya U.S. holder on the sale, redemption or other disposition of preferred sharesor ADSs will be subject to U.S. federal income taxation as capital gain or lossin an amount equal to the difference between such U.S. holder’s basis in thepreferred shares or the ADSs and the amount realized on the disposition.  Gain realized by a U.S. holder on a sale,redemption or other disposition of preferred shares or ADSs, including gainthat arises because the U.S. holder’s basis in the preferred shares or ADSs hasbeen reduced because a distribution is treated as a return of capital ratherthan as a dividend, generally will be treated as U.S. source income for U.S.foreign tax credit purposes.

 

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 creditsfor these Brazilian taxes and any Brazilian taxes imposed on distributions thatdo not constitute dividends for U.S. tax purposes is subject to certainlimitations and involves the application of rules that depend on a U.S.holder’s particular circumstances. U.S. holders should consult their own taxadvisors regarding the application of the foreign tax credit rules totheir investment in, and disposition of, preferred shares or ADSs.

 

A holder of preferredshares or ADSs that is not a U.S. holder will not be subject to U.S. federalincome or withholding tax on gain realized on the sale of preferred shares orADSs, unless (i) such gain is effectively connected with the conduct bythe holder of a trade or business in the United States or (ii) in the caseof gain realized by an individual holder, the holder is present in the UnitedStates for 183 days or more in the taxable year of the sale and certain otherconditions are met.

 

*InformationReporting and Backup Withholding*.  The information reporting requirements willgenerally apply to U.S. holders of ADSs. A holder of ADSs that is not a U.S. holder may be required to complywith applicable certification procedures to establish that they are not UnitedStates persons in order to avoid the application of U.S. information reportingrequirements and backup withholding tax.

 

114

----

 

**Dividendsand Paying Agents**

 

We pay dividends onpreferred shares in the amounts and in the manner set forth under “Item 8.  FinancialInformation—Dividend Policy and Payments.” We will pay dividends in respect of preferred shares represented by ADSsto the custodian for the depositary bank, as record owner of the preferredshares represented by ADSs.  As promptlyas practicable after receipt of the dividends we pay through Citibank N.A. tothe custodian, it will convert these payments into U.S. dollars and remit suchamounts to the depositary bank for payment to the holders of ADSs in proportionto individual ownership.

 

**Documentson Display**

 

We are subject to theinformational requirements of the Securities Exchange Act of 1934, asamended.  In accordance with theserequirements, we file reports and other information with the Commission.  These materials, including this annual reportand the accompanying exhibits, may be inspected and copied at the Commission’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C.20549.  Copies of the materials may beobtained from the Commission’s Public Reference Room at prescribedrates.  The public may obtain informationon the operation of the Commission’s Public Reference Room by calling theCommission in the United States at 1-800-SEC-0330.  In addition, copies of the exhibits thataccompany this annual report may be inspected at our principal executiveoffices located at Avenida Barbacena, 1200, 30190–131 Belo Horizonte, MinasGerais, Brazil.

 

**Insurance**

 

We have obtained, since February 2004,insurance policies to cover damages to the turbines, generators andtransformers of our major power plants and substations caused by fire and riskssuch as equipment failures.  We do nothave general third party liability insurance covering accidents and have notsolicited bids relating to this type of insurance.  However, we may contract for this type ofinsurance in the future.  In addition, wehave 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 nothave insurance coverage for business interruption risk, which means damages wesuffer and consequential damages suffered by our customers resulting from aninterruption in power distribution are generally not covered by our insuranceand we may be subject to significant related losses.  See “Item 3. Key Information—Risk Factors—Risks Relating to CEMIG—We operate withoutgeneral third party liability and catastrophe insurance policies.”

 

We believe that, since wehave contracted for fire and operational risk insurance, our insurance coveragewill be at a level that is customary in Brazil for the type of businesses inwhich we are engaged.

 

**Difficultiesof Enforcing Civil Liabilities Against Non-U.S. Persons**

 

We are a state-controlled mixed capital company establishedunder the laws of Brazil.  All of ourexecutive officers and directors presently reside in Brazil.  In addition, substantially all of our assetsare located in Brazil.  As a result, itwill be necessary for holders of ADSs to comply with Brazilian law in order toobtain an enforceable judgment against our executive officers or directors orour assets.  It may not be possible forholders of ADSs to effect service of process within the United States upon ourexecutive officers and directors, or to realize in the United States uponjudgments against these persons obtained in U.S. courts based upon civil liabilitiesof these persons, including any judgments based upon U.S. federal securitieslaws, to the extent these judgments exceed these persons’ U.S. assets.  We have been advised by Brazilian counsel,Machado, Meyer, Sendacz e Opice Advogados, that judgments of U.S. courts forcivil liabilities based upon the federal securities laws of the United Statesmay be, subject to the requirements described below, enforced in Brazil. Ajudgment against us, or the persons described above obtained outside Brazil withoutreconsideration of the merits, is subject to confirmation by the BrazilianSuperior Court of Justice. That confirmation will occur if the foreignjudgment:

 

•              fulfills all formalities required for itsenforceability under the laws of the country where the foreign judgment isgranted;

 

115

----

 

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

 

•              is not subject to appeal;

 

•              is for the payment of a sum certain;

 

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

 

•              is not contrary to Brazilian national sovereignty,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.

 

We were further advisedby respective Brazilian counsel that:

 

•              original actions based on thefederal securities laws of the United States may be brought in Brazilian courtsand that, subject to Brazilian public policy and national sovereignty,Brazilian courts will enforce liabilities in such actions against us and ourofficers; and

 

•              the ability of a judgment creditoror the other persons named above to satisfy a judgment by attaching our assetsor those of the selling shareholders is limited by provisions of Brazilian law.

 

A plaintiff (whetherBrazilian or non-Brazilian) residing outside Brazil during the course oflitigation in Brazil must provide a bond to guarantee court costs and legalfees if the plaintiff owns no real property in Brazil that could secure suchpayment. The bond must have a value sufficient to satisfy the payment of courtfees and defendant’s attorney fees, as determined by a Brazil judge. Thisrequirement does not apply to proceeding to enforce a foreign judgment, whichhas been confirmed by the Brazilian Superior Court of Justice.

 

# **Item 11.         Quantitative and QualitativeDisclosures about Market Risk**

# ** **

We are exposed to marketrisk from changes in foreign currency exchange rates and interest rates.

 

We are exposed to foreignexchange risk because certain of our loans and financings are denominated incurrencies (primarily the U.S. dollar) other than the currency in which we earnrevenues (the *real*).  Despite the fact that our electricitypurchases from Itaipu, which represented approximately R$1,205 million in 2004,are denominated in U.S. dollars, the related foreign exchange risk is no longerreflected in our operating revenues and operating expenses due to ratelegislation changes in 2001 which allow electricity utilities such as us torecord exchange rate losses related to Itaipu purchases as deferred regulatoryassets.  See “Item 5.  Operating and Financial Review andProspects—Critical Accounting Estimates.”

 

**ExchangeRate Risk**

 

At December 31, 2004,approximately 26.9% of our outstanding indebtedness, or R$1,119 million, wasdenominated in foreign currencies, of which approximately 76.5%, or R$857million, was denominated in U.S. dollars. We do not have substantial revenues denominated in any foreigncurrencies and, due to regulations that require us to keep excess cash ondeposit in *real*-denominated accounts at Brazilianbanks, we do not have monetary assets denominated in foreign currencies.

 

In 2004, we usedfinancial instruments such as interest rate swaps to hedge our foreign exchangerate exposure.  The purpose of the swapswas to reduce our exposure on the original interest rate of certain financingfrom an interest rate calculated based on the U.S. dollar/*real* exchange rate to an interest ratecalculated based on the

 

116

----

 

Certificado de DepósitoInterbancário—CDI (Interbank Deposit Certificate) rate.  See Notes 2(d), 14, 21, 23 and 24 to ourconsolidated financial statements.

 

In 2005, the potentialloss we would experience in the event of a hypothetical 20% depreciation of the*real* would be approximately R$141million related principally to loans and financing and primarily due to anincrease in our *real*-denominated interestexpense, which would be reflected on our income statement.  In 2005, a hypothetical 20% depreciation ofthe*real* would result in anadditional annual cash outflow of approximately R$305 million, reflecting theincreased cost in *reais* ofservicing foreign currency-denominated indebtedness and increased purchasingpower 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 also assumes that the unfavorable fluctuationin the exchange rate affecting the purchase of energy from Itaipu would affectthe annual cash payments but would not affect the expense recorded on thestatement of operations, since the additional currency exchange expense wouldbe recorded as a deferred regulatory asset.

 

The tables below providesummary information regarding our exposure to exchange rate risk as of December 31,2004:

 
| ** **                                     | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|
| U.S. Dollar                                    |       |     |       |
| Financing                                      |       | 857      |       |
| Less Contracted  derivative instruments        |       | (234     | )          |
|                                           |       | 623      |       |
| Japanese Yen                                   |       |     |       |
| Financing                                      |       | 182      |       |
| Less Contracted  derivative instruments        |       | (180     | )          |
|                                           |       | 2        |       |
| Other Currencies                               |       |     |       |
| Financing                                      |       | 80       |       |
| Net liabilities  exposed to exchange rate risk |       | 705      |       |

 

**InterestRate Risk**

 

At December 31, 2004, we had R$4,167 million in loans andfinancing outstanding, of which approximately R$3,369 million bore interest atfloating rates.  Of this R$3,369 million,R$3,047  million is subject to monetaryrestatement through the application of inflation indices established by theFederal Government, principally the IGP-M, and R$322 million is subjectprincipally to LIBOR.  In addition to thefloating rate debt described above, we also had assets, net of otherliabilities, at December 31, 2004 that bore interest at floating rates inthe amount of R$5,708 million.  Theseassets consisted mainly of our account receivable from the State Government anddeferred regulatory assets, partially offset by CCEE obligations, bearinginterest at rates tied to IGP-DI and SELIC, respectively.  As summarized in the tables below, since theassets that bore interest at floating rates were higher than the obligationsthat bore interest at floating rates, we did not have exposure to interest raterisk as of December 31, 2004.

 

117

----

 
| ** **                    | ** ** | **Total Debt Portfolio** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **R$ Million**      | ** ** |
| Floating rate  debt:          |       |                     |       |
| *Real-*denominated            |       | 3,047                    |       |
| Foreign  currency-denominated |       | 322                      |       |
|                          |       | 3,369                    |       |
| Fixed rate debt:              |       |                     |       |
| Foreign  currency-denominated |       | 798                      |       |
|                          |       |                     |       |
| Total                         |       | 4,167                    |       |

 
| ** **                                                                          | ** ** | **Total Portfolio  Floating Rate** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                          | ** ** | **(R$ million)**              | ** ** |
| Assets:                                                                             |       |                               |       |
| Cash and cash  equivalents                                                          |       | 826                                |       |
| Restricted  investment                                                              |       | 20                                 |       |
| Account  receivable from State Government                                           |       | 1,097                              |       |
| Deferred  regulatory assets                                                         |       | 3,765                              |       |
| Total                                                                               |       | 5,708                              |       |
|                                                                                |       |                               |       |
| Liabilities:                                                                        |       |                               |       |
|                                                                                |       |                               |       |
| Account payable  to suppliers-payment to generator for energy purchased on the CCEE |       | (364                               | )          |
| Floating rate  debt                                                                 |       | (3,369                             | )          |
| Derivative  instruments(1)                                                          |       | (414                               | )          |
| Total  liabilities                                                                  |       | (4,147                             | )          |
|                                                                                |       |                               |       |
| Total                                                                               |       | 1,561                              |       |

 

----

(1)     Swaps 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.

 

The tables below provide information, as of December 31,2004, with respect to our debt obligations that are sensitive to changes ininterest rates and exchange rates, including the expected maturity dates andannual average interest rates relating thereto. Variable interest rates are based on the applicable reference rate as ofDecember 31, 2004.

 

118

----

 
| ** **                         | ** ** | **Expected  Maturity Date  (Amounts expressed in R$ million)** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Debt Obligation**                | ** ** | **2006**                                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and  after** | ** ** | **Total  Long  Term** | ** ** |
|                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency-denominated debt: |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                         |       | 51                                                                  |       | 222 |   | 42 |   | 176 |   | 8 |   | 8 |   | 73 |   | 580 |   |
| Floating rate                      |       | 74                                                                  |       | 37 |   | 14 |   | 12 |   | 11 |   | 11 |   | 38 |   | 197 |   |
|                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Real-*denominated debt:           |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Floating rate                      |       | 736                                                                 |       | 203 |   | 380 |   | 248 |   | 78 |   | 24 |   | 304 |   | 1,973 |   |
|                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                              |       | 861                                                                 |       | 462 |   | 436 |   | 436 |   | 97 |   | 43 |   | 415 |   | 2,750 |   |

 
| ** **                                          | ** ** | **Expected  Annual Average Interest Rate (%)** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|
| **Debt Obligation**                                 | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012  and  after** | ** ** |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency-denominated debt:                  |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                          |       | 6.19                                           |       | 6.12 |   | 5.79 |   | 5.63 |   | 7.37 |   | 7.41 |   | 7.50 |   |
| Floating rate                                       |       | 3.84                                           |       | 3.22 |   | 2.87 |   | 2.79 |   | 2.65 |   | 2.41 |   | 2.22 |   |
| Floating rate (excluding inflation indices)         |       | 13.85                                          |       | 13.22 |   | 12.98 |   | 12.87 |   | 7.83 |   | 7.83 |   | 6.62 |   |
| Floating rate (including expected inflationindices) |       | 18.86                                          |       | 18.22 |   | 17.98 |   | 17.27 |   | 12.83 |   | 12.83 |   | 11.62 |   |

 

# **Item 12.         Description of Securities Other thanEquity Securities**

 

Not applicable.

 

119

----

 

**PART II**

** **

# **Item 13.         Defaults, Dividend Arrearages andDelinquencies**

 

Empresa de Infovias S.A.’s loan from MBK FurukawaSistemas S.A./Unibanco, in the total principal amount of R$58.0 million as of December 31,2004, of which R$40.8 million is classified as long-term liabilities in ourconsolidated financial statements, contains certain financial covenants that,in the event of noncompliance, may cause the amount due under the contract tobecome immediately due.  These covenantsare based on the financial statements prepared in accordance with theaccounting practices adopted in Brazil. Empresa de Infovias S.A. has obtained a waiver from the creditors thatare parties to this contract. The waiver affirms that such creditors will not exercisetheir rights to demand either accelerated or immediate payment of the totalamount due until December 31, 2005. This loan is classified as a current and long-term liability accordingto the original terms of the respective contract, in compliance with the waiverobtained.

 

# **Item 14.         Material Modifications to the Rights ofSecurity Holders and Use of Proceeds**

# ** **

Not applicable.

 

# **Item 15.         Controls and Procedures**

# ** **

**Evaluation of disclosure controlsand procedures**

 

The conclusions of ourChief Executive Officer and Chief Financial and Investor Relations Officerabout the effectiveness of our disclosure controls and procedures, based ontheir evaluation of these controls and procedures as of December 31, 2004,are as follows:

 

Our disclosure controlsand procedures are designed to ensure that information required to be disclosedby us is recorded, processed, summarized and reported within requiredtimeframes.  Our disclosure controls andprocedures include controls and procedures designed to ensure that informationrequired to be disclosed is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial and InvestorRelations Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  Based on their assessmentsof our disclosure controls and procedures, our Chief Executive Officer andChief Financial and Investor Relations Officer have concluded that thedisclosure controls and procedures have functioned effectively and that theconsolidated financial statements fairly present our consolidated financialposition and the results of our operations for the periods presented.

 

**Changes in internal controls**

 

There has been nochange in our internal control over financial reporting during the year ended December 31,2004 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

### **Item 16A.      AuditCommittee Financial Expert**

### ** **

Since we have not yetestablished an audit committee, our Board of Directors currently performs thefunctions of an audit committee.  OurBoard of Directors is in the process of discussing the establishment of anaudit committee, which we are required to have in place by July 31,2005.  Our Board of Directors has not yetdetermined whether any of its members qualify as an audit committee financialexpert, but it is currently discussing the selection of an audit committeefinancial expert.

 

### **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 toour Chief Executive Officer, Chief Financial and Investor Relations Officer andpersons performing similar functions as well as to our directors and other officersand

 

120

----

 

employees.  Our code of ethics was filed with the SEC as Exhibit 11to our Annual Report on Form 20-F for the fiscal year ended December 31,2003, and is also available on our website at www.cemig.com.br.  If we amend the provisions of our code ofethics that apply to our Chief Executive Officer, Chief Financial Officer andpersons performing similar functions, or if we grant any waiver of suchprovisions, we will disclose such amendment or waiver on our web site atwww.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, 2003 and 2004:

 
| ** **          | ** **   | **Year ended December 31,** | ** ** |
|---------------------|--------------|----------------------------------|------------|
| ** **          | ** **   | **2004**                         | ** ** | **2003** | ** ** |
| ** **          | *** *** | **(thousands of reais)**         | ** ** |
| Audit fees          |         | 777                              |       | 416 |   |
| Tax fees            |         | 43                               |       | 14 |   |
| Audit-related  fees |         | 80                               |       | — |   |
| Total fees          |         | 900                              |       | 430 |   |

 

*Auditfees*.  Audit fees inthe above table are the aggregate fees billed by Deloitte Touche TohmatsuAuditores Independentes in connection with the audit of our annual financialstatements prepared in accordance with the accounting practices adopted inBrazil and the United States and the review of our quarterly statutoryfinancial statements.

 

*TaxFees*.  Tax fees arefees for professional services rendered by Deloitte Touche Tohmatsu AuditoresIndependentes for tax compliances services.

 

*Audit-relatedfees*. Audit-related fees refers to due diligence related tothe acquisition of Rosal Energia S.A., agreed upon procedures related to theapplication of certain ANEEL rates on energy sales and services in connectionwith compliance with the Sarbanes-Oxley Act.

 

We did not incur any fees for non-audit services in2004 and 2003.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

Our Board of Directors currently serves as our auditcommittee for purposes of the Sarbanes-Oxley Act of 2002.  We have adopted pre-approval policies andprocedures under which all audit and non-audit services provided by ourexternal auditors must be pre-approved by the Board of Directors.  Any service proposals submitted by externalauditors need to be discussed and approved by the Board of Directors during itsmeetings.  Once the proposed service isapproved, we formalize the engagement of services.  The approval of any audit and non-auditservices to be provided by our external auditors is specified in the minutes ofour Board of Directors.

 

### **Item 16D.      Not Applicable**

### ** **

### **Item 16E.       Purchasesof Equity Securities by the Issuer and Affiliated Purchasers.**

 

None.

 

121

----

 

**PART III**

 

### **Item17.         Financial Statements**

### ** **

Not applicable.

 

### **Item18.         Financial Statements**

### ** **

Reference is made to pages F-1through F-57 hereof.

 

The following financialstatements 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, 2004 and 2003

 

•                                          AuditedConsolidated Statements of Operations and Comprehensive Income (Loss) for theyears ended December 31, 2004, 2003 and 2002

 

•                                          AuditedConsolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,2004 2003 and 2002

 

•                                          AuditedConsolidated Statements of Cash Flows for the years ended December 31,2004, 2003 and 2002

 

•                                          Notesto the Consolidated Financial Statements

 

### **Item19.         Exhibits**

### ** **

The following documents are included as exhibits tothis annual report:

 
| **Exhibit Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                     |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 1                  |       | Corporate by-laws of  CEMIG, as amended and in effect since December 13, 2004.                                                                                                                                                                                                                                                                                              |
|               |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 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)).                                                     |
|               |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 3                  |       | Agreement, dated  June 17, 2002, between Empresa de Infovias S.A. and CLIC, relating to  the shares of WAY TV (incorporated by reference to Exhibit 3 to our Annual  Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)).                                                                                                                                  |
|               |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 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)).               |

 

122

----

 
| **Exhibit Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                |       | 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)).                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.4                |       | 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)).                                                                                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5                |       | 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)).                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6                |       | 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)).                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7                |       | 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)).                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8                |       | 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)). |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.9                |       | 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)).                                                                                                                                                    |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10               |       | 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.                                                                                                                                                                                                                                                          |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 8                  |       | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 May 25, 2005.                                                                                                                                                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 12.2               |       | Chief Financial and  Investor Relations Officer Certification pursuant to Section 302 of the  Sarbanes-                                                                                                                                                                                                                                                                                                                                             |

 

123

----

 
| **Exhibit Number** | ** ** | **Document**                                                                                                                                            |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       | Oxley Act of 2002,  dated May 25, 2005.                                                                                                            |
|               |       |                                                                                                                                                    |
| 13.1               |       | Chief Executive Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated May 25, 2005.                        |
|               |       |                                                                                                                                                    |
| 13.2               |       | Chief Financial and  Investor Relations Officer Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, dated May 25, 2005. |

 

We have omitted from the exhibits filed with orincorporated by reference into this annual report certain instruments andagreements with respect to our long-term debt, none of which authorizessecurities in a total amount that exceeds 10% of our total assets.  We hereby agree to furnish to the Commissioncopies of any such omitted instruments or agreements as the Commission requests.

 

124

----

 

**SIGNATURES**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20–Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|                    | COMPANHIA ENERGÉTICA DE MINAS |
|-------------------------|------------------------------------|
|                    | GERAIS – CEMIG                |
|                    |                               |
|                    | By:                                | /s/ Djalma Bastos de Morais |   |
|                    | Name:                              | Djalma Bastos de Morais |
|                    | Title:                             | Chief Executive Officer |
|                    |                               |
|                    |                               |
| Date: May 25, 2005 |                               |

 

125

----

 

**INDEX OF DEFINED TERMS**

 
| Acesita                                     | 28     |
|---------------------------------------------|--------|
| ACL                                         | 21     |
| ACR                                         | 21     |
| ADRs                                        | 2      |
| ADSs                                        | 2      |
| American Depositary Receipts                | 2      |
| American Depositary Shares                  | 2      |
| ANA                                         | 43     |
| ANEEL                                       | 2      |
| Annex V Regulations                         | 108    |
| ASMAE                                       | 76     |
| average rate                                | 56     |
| basic transmission network                  | 31     |
| BNDES                                       | 77     |
| Board of Trade of Minas Gerais              | 94     |
| Brazil                                      | 1      |
| Brazilian Corporate Law                     | 1      |
| CBEE                                        | 61, 65 |
| CCC Account                                 | 40     |
| CCPE                                        | 1      |
| CEB                                         | 30     |
| CEMIG                                       | 1      |
| Central Bank                                | 6      |
| CGSE                                        | 5      |
| CHESF                                       | 1      |
| CLIC                                        | 42     |
| CNPE                                        | 7      |
| Code                                        | 109    |
| CODs                                        | 48     |
| COFINS                                      | 60     |
| Commission                                  | 1      |
| common shares                               | 2      |
| Company                                     | 1      |
| CONAMA                                      | 44     |
| Concessions Law                             | 11     |
| COPAM                                       | 43     |
| COPASA                                      | 29     |
| COS                                         | 48     |
| CPMF                                        | 63, 67 |
| Cruzado Plan                                | 84     |
| CVM                                         | 17     |
| CVRD                                        | 28     |
| DETEL/MG                                    | 80     |
| dollars                                     | 1      |
| EITF 92-07                                  | 54     |
| Eletrobrás                             | 35     |
| Eletronuclear                               | 2      |
| Energy Crisis Committee                     | 58     |
| EPE                                         | 21     |
| ERM                                         | 13     |
| FASB                                        | 56     |
| FEAM                                        | 43     |
| Federal Government                          | 3      |
| floating market                             | 6      |
| FNDCT                                       | 71     |
| Free Consumers                              | 8      |
| Gasmig                                      | 20     |
| GCE                                         | 4      |
| GDP                                         | 2      |
| General Agreement of the Electricity Sector | 54     |
| guaranteed return                           | 14     |
| GW                                          | 2      |
| GWh                                         | 2      |
| IBAMA                                       | 44     |
| IBGE                                        | 2      |
| IGP-M index                                 | 22     |
| IOF                                         | 112    |
| IPHAN                                       | 43     |
| IPPs                                        | 24     |
| Itaipu                                      | 24     |
| kW                                          | 2      |
| kWh                                         | 2      |
| LATIBEX                                     | 91     |
| MGI                                         | 40     |
| Minas Gerais                                | 2      |
| MMA                                         | 46     |
| MVA                                         | 26     |
| MW                                          | 2      |
| MWh                                         | 2      |
| National Monetary Council                   | 10     |
| non-Brazilian holder                        | 109    |
| noon buying rate                            | 1      |
| NYSE                                        | 18     |
| ONS                                         | 10     |
| OTC                                         | 90     |
| Parcel A costs                              | 21     |
| PASEP                                       | 60     |
| preferred shares                            | 2      |
| R$1                                         |   |
| *reais*                                     | 1      |
| *real*                                      | 1      |
| regulatory extraordinary rate adjustment    | 64     |
| RTE                                         | 4      |
| São Paulo Stock Exchange               | 18     |
| Securities Act                              | 19     |
| SELIC                                       | 105    |
| SEMAD                                       | 43     |
| SFAS No. 71                            | 54     |
| SIESE                                       | 2      |
| SISNAMA                                     | 46     |
| Southern                                    | 15     |
| Special Quorum Provisions                   | 104    |
| State Government                            | 3      |
| TUSD                                        | 22     |
| TUST                                        | 22     |
| U.S. dollars                                | 1      |
| U.S. GAAP                                   | 1      |
| U.S. holder                                 | 109    |

 

126

----

 
| UBP Fund                        | 12     |
|---------------------------------|--------|
| United States dollars           | 1      |
| US$                             | 1      |
| Usiminas                        | 28     |
| Vallourec & Mannesmann | 29     |
| VAT                             | 61, 65 |
| WAY TV                          | 13     |

 

127

----

**ANNEX A**

** **

**THEBRAZILIAN POWER INDUSTRY**

** **

## **The Brazilian Electricity System Overview**

## ** **

The Brazilian electricitysystem consists of two large interconnected systems—one for the South,Southeast and Midwest Regions and the other for the North and Northeast Regions—andseveral small isolated systems in the north and west.  The two large systems (which together accountfor 96.6% of the capacity) are interconnected through a 1,700 MW high-voltagetransmission line.

 

Brazil’s abundanthydrological resources are managed through storage reservoirs. It is estimatedthat Brazil has a hydroelectric power generation potential of 260,000 MW, ofwhich only 26% has been developed, according to the Electrical Energy ExpansionCommittee, or CCPE.

 

The table below shows theinstalled capacity of electric power generation in the interconnected powersystem (excluding non-connected systems and self-production capacities),divided into hydroelectric and thermoelectric generation capacity, from 1991through 2004 in MW.

 
| **Year** | ** ** | **Hydroelectric** | ** ** | **Thermoelectric** | ** ** |
|----------|------------|-------------------|------------|--------------------|------------|
| 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     |       | 65,735            |       | 9,214              |       |
| 2003     |       | 66,321            |       | 9,226              |       |
| 2004     |       | 67,503            |       | 10,456             |       |

 

----

Sources: National System Operator — ONS

 

Brazil has an installedcapacity in the interconnected power system of 78 GW, of which approximately87% is hydroelectric.  The installedcapacity includes half of the installed capacity of Itaipu — 12,600 MW ownedequally between Brazil and Paraguay. According to data from the National System Operator — ONS, Brazil’sinstalled capacity is projected to increase to approximately 90 GW by 2009, ofwhich 14% is projected to be thermoelectric and 86% is projected to behydroelectric.  There are approximately45,368 miles of transmission lines with voltages equal to or higher than 230kVin Brazil.

 

Approximately 35% ofBrazil’s installed generating capacity and 64% of Brazil’s high voltagetransmission lines are operated by Centrais Elétricas Brasileiras S.A., orEletrobrás, a company owned by the federal government of Brazil, or the FederalGovernment.  Eletrobrás has historicallybeen responsible for implementing electric policy, conservation andenvironmental management programs.  Itcontrols five subsidiaries responsible for the generation, transmission anddistribution of electricity in the north, northeast and southeast of Brazil:Centrais Elétricas do Norte do Brasil S.A., or Eletronorte; CompanhiaHidroelétrica do São Francisco, or CHESF; Furnas Centrais Elétricas S.A., orFurnas; Companhia de Geração Térmica de Energia Elétrica — CGTEE and EmpresaTransmissora de Energia 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 controls EletrobrásTermonuclear S.A., or Eletronuclear, a company formed following a partialsplit-up of Furnas.  The remaining high 

 

A-1

----

 

voltage transmissionlines are owned by state-controlled electric power companies.  Distribution is conducted by approximately 60state or local utilities, a majority of which have been privatized by theFederal Government or state governments.

 

#### *ElectricitySupply and Demand*

#### * *

Between 1986 and 2004,the consumption of electricity in Brazil grew by approximately 3.7% per year(from 166.7 GWh to 320.8 GWh), the number of consumers increased byapproximately 4.3% per year (from 25,900 thousand to 54,843 thousand) and thetotal installed capacity increased by more than 4.1% per year (from 43,264 MWto 88,629 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, 2004.

 
| **Year**   | ** ** | **Energy  Consumption** | ** ** | **Energy  Consumption** | ** ** | **GDP Growth (%)** | ** ** | **Population**    | ** ** |
|------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|-------------------|------------|
| ** ** | ** ** | **(in GWh)**            | ** ** | **(% Growth)**          | ** ** | ** **         | ** ** | **(in millions)** | ** ** |
| 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       |       | 259.3                   |       | 4.3                     |       | 2.7                |       | 161.2             |       |
| 1997       |       | 276.8                   |       | 6.7                     |       | 3.3                |       | 163.4             |       |
| 1998       |       | 287.5                   |       | 3.9                     |       | 0.1                |       | 165.7             |       |
| 1999       |       | 292.7                   |       | 1.8                     |       | 0.8                |       | 167.9             |       |
| 2000       |       | 307.5                   |       | 5.1                     |       | 4.4                |       | 170.1             |       |
| 2001       |       | 283.3                   |       | (7.9                    | )          | 1.3                |       | 172.4             |       |
| 2002       |       | 290.5                   |       | 2.5                     |       | 1.9                |       | 174.6             |       |
| 2003(1)    |       | 307.0                   |       | 5.7                     |       | 0.5                |       | 179               |       |
| 2004       |       | 320.8                   |       | 4.5                     |       | 5.2                |       | 183.4             | (2)        |

 

----

(1)   Updated information

(2)   IBGE forecast

 

Sources: *Sistema de Informações Empresariais do Setor de Energia Elétrica*(Brazilian Business Information System for the Energy Sector), or SIESE; *Instituto Brasileiro de Geografia e Estatística*(BrazilianInstitute of Geography and Statistics), or IBGE; and the Ministry of Mines andEnergy - MME.

 

Between 1986 and the endof 2004, consumption of electricity in Brazil generally grew at a faster ratethan Brazil’s GDP, with the exception of 1993 and 1994, during which laborintensive industries lowered their output. Even in years in which the GDP hadnegative growth, electricity consumption increased.  Overall electricity consumption growthaveraged 5.6% per year from 1970 to 2004. According to 2005 energy operation planning from Eletrobrás - CTEM, theBrazilian consumption growth rate should reach an average of 5.3% per year forthe next five-year period.  The followingtable illustrates the forecasted breakdown of the consumption growth rate perregion:

 

A-2

----

 
| **Period** | ** ** | **North   Integrated** | ** ** | **Northeast  Integrated** | ** ** | **Southeast/   Midwest   Integrated** | ** ** | **South   Integrated** | ** ** | **Brazilian   Average** | ** ** |
|------------|------------|------------------------|------------|---------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------|------------|
| 2005-2009  |       | 9.4                    | %          | 6.7                       | %          | 4.3                                   | %          | 5.8                    | %          | 5.3                     | %          |

 

----

Source: Eletrobrás - CTEM— Planning Cycle 2004

 

The following tableprovides information relating to the probability of electricity shortfalls inthe South, Southeast/Midwest, North and Northeast Regions in the coming years:

 
| ** **        | ** ** | **Probability of Electricity Shortfalls****(%)** | ** ** |
|-------------------|------------|--------------------------------------------------|------------|
| **Region**        | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| South             |       | 0.1                                              |       | 0.3 |   | 0.2 |   | 0.8 |   | 0.7 |   |
| Southeast/Midwest |       | 0.0                                              |       | 0.5 |   | 0.5 |   | 0.9 |   | 1.1 |   |
| North             |       | 1.6                                              |       | 1.1 |   | 1.0 |   | 1.5 |   | 2.3 |   |
| Northeast         |       | 0.0                                              |       | 0.8 |   | 1.4 |   | 3.0 |   | 4.5 |   |

 

----

Source: National SystemOperator — ONS, Monthly Operation Planning, January 2005

 

## **Historical Background**

## ** **

The BrazilianConstitution provides that the development, use and sale of energy may beundertaken directly by the Federal Government or indirectly through the grantingof concessions, permissions or authorizations. Historically, the Brazilian power industry has been dominated bygeneration, transmission and distribution concessionaires controlled by theFederal and State Governments.  In recentyears, the Federal Government has taken a number of measures to restructure thepower 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, theFederal Government has taken the following measures:

 

•                                          In 1990, theFederal Government created the National Privatization Program aiming attransferring to the private sector certain companies controlled by it,including those of the power industry.

 

•                                          The BrazilianConstitution was amended in 1995 to authorize foreign investment in powergeneration.  Prior to this amendment, allgeneration concessions were held either by a Brazilian individual or an entitycontrolled by Brazilian individuals or by the Federal or State Governments.

 

•                                          The FederalGovernment enacted Law No. 8,987 on February 13, 1995, or theConcessions Law, and Law No. 9,074 on July 7, 1995, or the PowerConcessions Law, that together

 

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

 

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

 

•                  provided for the creation ofgeneration entities, or Independent Power Producers, which, by means of aconcession, permission or authorization, may generate and sell the totality orpart of their electricity to Free Consumers, distribution concessionaires andtrading agents, among others;

 

A-3

----

 

•                  granted Free Consumers andelectricity suppliers open access to all distribution and transmission systems;and

 

•                  eliminated the need for a concessionto construct and operate power projects with capacity from 1 MW to 30 MW, orSmall Hydroelectric Power Plants.

 

•                                          Beginning in1995, a portion of the controlling interests held by Eletrobrás and variousstates in generation and distribution companies were sold to privateinvestors.  At the same time, certainstate governments also sold their stakes in major distribution companies.  While the majority of the distributioncompanies have been privatized, most generation capacity is still controlled byEletrobrás, by means of its subsidiaries Chesf, Eletronorte and Furnas.

 

•                                          In 1998, theFederal Government enacted Law No. 9,648, or the Power Industry Law, tooverhaul the basic structure of the electricity industry.  The Power Industry Law provided for thefollowing:

 

•                                      the establishmentof a self-regulated body responsible for the operation of the short-termelectricity market, or the Wholesale Energy Market, which replaced the priorsystem of regulated generation prices and supply contracts;

 

•                                      a requirementthat distribution and generation companies enter into initial energy supplyagreements, or the Initial Contracts, generally “take or pay” commitments, atprices and volumes approved by the Brazilian National Electric Energy Agency —ANEEL.  The main purpose of the InitialContracts was to ensure distribution companies have access to a stableelectricity supply at prices that guarantee a fixed rate of return for theelectricity generation companies during the transition period leading to theestablishment of a free and competitive electricity market;

 

•                                      the creation ofthe National Integrated System Operator (*Operador Nacional doSistema*, or ONS), a non-profit, private entity responsible for the operationalmanagement of the generation and transmission activities of the interconnectedpower system; and

 

•                                      the establishmentof public bidding processes for concessions for the construction and operationof power plants and transmission facilities.

 

•                                          In 2001,Brazil faced a serious energy crisis that lasted until the end of the firstquarter of 2002.  As a result, theFederal Government implemented measures that included:

 

•                                      a program for therationing of electricity consumption in the most adversely affected regions,namely the southeast, central-west and northeast regions of Brazil; and

 

•                                      the creation ofthe Electricity Crisis Management Chamber (*Câmarade Gestão da Crise de Energia Elétrica,* or GCE), which passed aseries of emergency measures that provided for reduced electricity consumptiontargets for residential, commercial and industrial consumers in the affectedregions by introducing special rate regimes that encouraged the reduction ofelectricity consumption.

 

•                                          In March 2002,the GCE suspended the emergency measures and electricity rationing as a resultof large increases in supply (due to a significant rise in reservoir levels)and a moderate reduction in demand, and accordingly, the Federal Governmentenacted new 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 informationregarding the rationing, see “Rationing and Extraordinary Rate Increases”.

 

A-4

----

 

•                                          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.

 

•                                          On March 15,2004, the Federal Government enacted Law No. 10,848, or the New IndustryModel Law, in an effort to further restructure the power industry with theultimate goal of providing consumers with secure electricity supplies combinedwith low rates.  On July 30, 2004the Federal Government published Decree 5,163, governing the purchase and saleof electricity under the New Industry Model Law, as well as the granting ofauthorizations and concessions for electricity generation projects.  These include rules relating to auctionprocedures, the form of power purchase agreements and the method of passingcosts through to final customers.

 

The New IndustryModel Law is still subject to further regulation to be issued by ANEEL and theMME. For additional information regarding the New Industry Model Law, see “—TheNew Industry Model Law.”

 

## **Rationing and Extraordinary Rate Increases**

## ** **

Below average rainfall inthe years preceding 2001 resulted in low reservoir levels and low hydroelectriccapacity in the southeast, central west and northeast regions.  Attempts to offset dependence onhydroelectric plants with gas-fired thermal generation plants delayed due toregulatory and other issues.  In responseto the energy shortage, on May 15, 2001, the Federal Government createdthe GCE to regulate and administer the program for reduction of energyconsumption to avoid the interruption 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 ofthe rationing measures, the Federal Government, through Decree No. 4,261of June 6, 2002, extinguished the GCE and created the *Câmara deGestão do Setor Elétrico* (the Electricity Sector ManagementCommittee), or CGSE, to replace the GCE as coordinator of the electricity sectorrevitalization measures, and to give support to the Federal Government withrespect to related issues.

 

Law No. 10,438 of April 26,2002 authorized the General Agreement of the Electricity Sector, which wasdesigned to resolve issues related to the Electricity Rationing Plan byproviding for compensation for rationing-related losses to generation anddistribution companies in Brazil and restoring the economic equilibrium of theconcession agreements, which was thrown out of balance during the rationingperiod.

 

Such Law authorized anextraordinary rate increase, or RTE, applicable to final customers that wouldcompensate both generators and distributors for such rationing-relatedlosses.  The increased rates will be inforce for an average period of 72 months from January 2002.  The RTE also covers financial lossesresulting from those costs that are beyond the control of the distributor,referred to as Parcel A costs, from January 2001 to October 2001 aswell as losses of generators incurred as a result of payment of free energycosts above the Initial Contract average price. The RTE percentage charged for residential customers (excludinglow-income customers), rural customers, public street lighting and high-tensionindustrial customers 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 customers was 7.9%, producing aweighted average increase of 5.87%.

 

Pursuant to Law 10,438, theNational Bank for Economic Development (*Banco Nacional deDesenvolvimento Econômico e Social*, or BNDES), created a specialprogram to finance 90% of the amounts recoverable by means of the RTE.  The loans are repayable over the rateincrease collection period.

 

In April 2003, theFederal Government, fearing that rate increases may contribute to overallinflation in Brazil, decided to delay a rate increase to which distributioncompanies were entitled under ANEEL resolutions to recover intra-annual variationof Parcel A costs.  On November 11,2003, with the enactment of Law 10,792, the Federal Government implemented anemergency program designed to compensate distribution companies for the lossesincurred due to the non-consideration of the intra-annual variation of Parcel Acosts on occasion of the annual 

 

A-5

----

 

rate readjustments thattook place from April 2003 to April 2004.  Such program guaranteed to the applicablecompanies a loan from BNDES under special conditions.

 

## **Concessions**

## ** **

The companies orconsortia that wish to build or operate facilities for generation, transmissionor distribution of electricity in Brazil must apply to the MME or to ANEEL, bydelegation of MME, as granting authority, for a concession, permission orauthorization, as the case may be. Concessions grant rights to generate, transmit or distribute electricityin the relevant concession area for a specified period.  This period is usually 35 years for newgeneration concessions, and 30 years for new transmission or distributionconcessions.  An existing concession maybe renewed at the granting authority’s discretion.

 

The Concession Lawestablishes, among other things, the conditions that the concessionaire mustcomply with in rendering electricity services, the consumer’s rights and theobligations of the concessionaire and the granting authority.  Furthermore, the concessionaire must complywith regulations in force governing the electricity sector.  The main provisions of the Concession Law aresummarized as follows:

 

•                                          *Adequate service*.  The concessionaire must render an adequateservice such as to satisfy, among other things, regularity, continuity,efficiency, safety and accessibility of the service.

 

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

 

•                                          *Strict liability. *The concessionaire is strictly liable for all damages arisingfrom the performance of its services and caused to consumers, to third partiesor to the granting authority.

 

•                                          *Changes in controlling interest*.  The granting authority must approve anydirect or indirect change in the concessionaire’s controlling interest.

 

•                                          *Intervention by the Granting Authority*.  The granting authority may intervene in theconcession, by means of a presidential decree, to ensure the concessionaire’sadequate performance of services, as well as the full compliance withapplicable contractual, regulatory and legal provisions in case the concessionaire fails to do so.  Within 30 days after the decree date, thegranting authority’s representative is required to commence an administrative proceedingin which the concessionaire is entitled to due process of law.  During the term of the administrativeproceeding, a person appointed by the granting authority’s decree becomesresponsible for carrying on the concession. If the administrative proceeding is not completed within 180 days afterthe decree date, the intervention ceases and the concession is returned to theconcessionaire.  The concession is alsoreturned to the concessionaire if the granting authority’s representativedecides not to terminate the concession and the concession term has not yetexpired.

 

•                                          *Termination of the concession*.  The concession termination agreement may beterminated through expropriation and/or forfeiture.  Expropriationis the early termination of a concession for reasons related to the publicinterest that must be expressly declared by law and based on publicinterest grounds.  Following theexpropriation, the concessionaire is entitled to receive an indemnification,which may or may not adequately compensate investments made by theconcessionaire in expropriated assets that have not been fully amortized ordepreciated by the time of the expropriation. Forfeiture must be declared by the granting authority after ANEEL, orMME, has made a final administrative ruling that the concessionaire has failedto adequately perform its obligations under the concession agreement.  The concessionaire is entitled to due process of law in the administrative proceedingdeclaring the forfeiture of the concession and can resort to the courts .  The concessionaire is entitled to receive an indemnification for theinvestments made by the concessionaire in expropriated assets that have notbeen fully amortized or depreciated, after 

 

A-6

----

 

deduction of any amounts corresponding to outstanding fines anddamages due by the concessionaire.

 

•                                          *Expiration. *Whenthe concession expires, all assets, rights and privileges that are materiallyrelated to the rendering of the electricity services revert to the Braziliangovernment.  Following the expiration,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 13, 2004 (which revoked Resolution 318), 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).  For each violation, thefines can be up to two per cent of the amount invoiced by the concessionairesin the 12-month period preceding any assessment notice.  Some infractions that may result in finesrelate to the failure of the operator to request ANEEL ́s approval in case of:

 

•                                          Execution ofcontracts with related parties in the cases provided by regulation.

 

•                                          Sale or assignment of the assets related to the services rendered as well asthe imposition of any encumbrances (including any security, bond, guarantee,pledge and mortgage) on them or any other assets related to the concession orthe revenues of the electricity services.

 

•                                          Changesin controlling interest of the holder of the authorization or concession.

 

**PrincipalRegulatory Authorities**

 

#### *NationalEnergy Policy Council*

#### * *

In August 1997, theNational Energy Policy Council (*Conselho Nacional dePolítica Energética*, or CNPE) was created to advise the Brazilianpresident with respect to the development and creation of the national energypolicy.  The CNPE is presided over by theMME, and the majority of its members are ministers of the FederalGovernment.  The CNPE was created tooptimize the use of Brazil’s energy resources and to assure the supply ofelectricity to the country.

 

#### *Ministryof Mines and Energy*

#### * *

The MME is the FederalGovernment’s primary regulator of the power industry.  Following the adoption of the New IndustryModel Law, the Federal Government, acting primarily through the MME, undertookcertain duties that were previously under the responsibility of ANEEL,including the drafting of guidelines governing the granting of concessions andthe issuance of directives governing the bidding process for concessionsrelating to public services and public assets.

 

#### *ANEEL*

#### * *

The Brazilian powerindustry is regulated by ANEEL, an independent federal regulatory agency.  After enactment of the New Industry ModelLaw, ANEEL’s primary responsibility is to regulate and supervise the powerindustry in line with the policy to be dictated by the MME and to respond tomatters which are delegated to it by the Federal Government and by theMME.  ANEEL’s current responsibilitiesinclude, among others,

 

•                                          administeringconcessions for electricity generation, transmission and distributionactivities, including the approval of electricity rates,

 

A-7

----

 

•                                          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 in1998 as a non-profit private entity comprised of Free Consumers and energyutilities engaged in the generation, transmission and distribution ofelectricity, in addition to other private participants such as importers andexporters.  The New Industry Model Law,regulated by Decree 5,081 of May 14, 2004, granted the Federal Governmentthe power to appoint three directors of the ONS, including theDirector-general.  The primary role ofthe ONS is to coordinate and control the generation and transmission operationsin the interconnected power system, subject to ANEEL’s regulation andsupervision.  The objectives andprincipal responsibilities of the ONS include, among others:

 

•                                          operationalplanning for the generation industry,

 

•                                          organizingthe use of the domestic interconnected power system and internationalinterconnections,

 

•                                          guaranteeingthat all parties in the industry have access to the transmission network in anon-discriminatory manner,

 

•                                          assistingin the expansion of the energy system,

 

•                                          proposingplans to the MME for extensions of the Basic Grid (which proposal shall betaken into account in planning the expansion of the transmission system) and

 

•                                          submittingrules for the operation of the transmission system for ANEEL’sapproval.  Generators must declare theiravailability to the ONS, which then attempts to establish an optimalelectricity dispatch program.

 

The active participationof the ONS as an instrument to ensure access to transmission grids occurs bymeans of contractual relationships established between the ONS, the owners ofthe basic transmission grid and the users of the transmission grid.  Such contractual relationships comprise thefollowing:

 

•                                          the *Contrato de Prestaçãode 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;

 

A-8

----

 

•                                          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*

#### * *

Beginning in 2002, theWholesale Energy Market became subject to the authorization, supervision andregulation of ANEEL.  Participants in theWholesale Energy Market include all of the large energy generating entities,distribution agents, importers and exporters of electricity and other entitiesauthorized by ANEEL to trade electric energy, or Energy Traders.  Smaller generation entities are also eligibleto participate in the Wholesale Energy Market.

 

The Wholesale EnergyMarket computes the spot price for electricity based on a publishedcriteria.  The electricity spot price iscurrently determined taking into account, among other factors, (1) theoptimal use of electricity resources, (2) the equilibrium between supplyand demand, (3) the load of the agents connected to the InterconnectedPower System and (4) projected electricity requirements.

 

The WholesaleElectricity Market ceased to exist and its assets were absorbed by the newEnergy Trading Chamber (CCEE), created by Degree 5,177 of August 12,2004.  The responsibilities of the CCEEinclude:

 

(i)                            tohold electricity purchase and sale auctions, as delegated by ANEEL;

 

(ii)                         to keepthe register of all Regulated-Environment Electricity Sale Contracts (CCEARs),and contracts resulting from adjustment auctions, and acquisition ofelectricity from “dispersed generation” (producers outlying from the grid) andany amendments to these contracts;

 

(iii)                      to keep therecords of the amounts of load and electricity that are subject of thecontracts signed in the Free Contracting Environment (ACL);

 

(iv)                     to measureand register the data on purchase and sale transactions and other data inherentto electricity services;

 

(v)                        tocalculate the Margin Settlement Prices (PLDs) for the short-term market, bysub-market;

 

(vi)                     to carry outthe accounting of the amounts of electricity sold and the financial settlementof the amounts arising from the electricity purchase and sale transactions inthe short-term market;

 

(vii)                  to ascertain anynon-compliance with the electricity contracting limits, and other infringementsand, if applicable, by delegation from ANEEL, under the terms instituted byANEEL, known as the Sale Convention, which establishes the structure and formof functioning of the Electricity Sale Chamber (CCEE), to apply the respectivepenalties; and

 

(viii)               to ascertain theamounts and take the necessary action for realization of the deposit, custodyand execution of the financial guarantees relating to the financial settlementsof the short-term market, in accordance with the Sale Convention.

 

#### *EnergyResearch Company - EPE*

#### * *

On August 16, 2004,the Federal Government enacted the decree that created the Electricity ResearchCompany, or EPE,**a state-ownedcompany, which is responsible for conducting strategic research on the energyindustry, including, among others, electric energy, oil, gas, coal andrenewable energy sources.  EPE isresponsible for (i) studying projections of the Brazilian energy matrix, (ii) preparingand publishing the national energy balance, 

 

A-9

----

 

(iii) identifyingand quantifying energy resources and (iv) obtaining the requiredenvironmental licenses for new generation concessionaires.

 

*TheElectricity Sector Monitoring Committee (CMSE)*

 

Decree 5,175 dated August 9,2004 established the Electricity Sector Monitoring Committee, or CMSE, referredto by Clause 14 of Law 10,848 of March 15, 2004, under the directcoordination of the Ministry of Mines and Energy, with the basic function ofmonitoring and permanently evaluating the continuity and security of theelectricity supply throughout all of Brazil. The CMSE will be chaired by the Minister of Mines and Energy and willhave the following composition: (i) four representatives from the Ministryof Mines and Energy; and (ii) the presidents of the following bodies:

 

a)              The NationalElectricity Agency — ANEEL;

 

b)             The National OilAgency — ANP;

 

c)              The Energy TradingChamber — CCEE;

 

d)             The ElectricityResearch Company — EPE; and

 

e)              the National Electricity System Operator — ONS.

 

The Minister of Mines and Energy may invite to meetings of the CMSE,among others, representatives of federal, state and municipal governmentbodies, and public and private entities, and also technical experts from theelectricity sector.

 

The responsibilities of theCMSE are: (i) to monitor the development of the activitiesof generation, transmission, distribution, sale, import and export ofelectricity, natural gas and oil; (ii) to evaluatethe conditions of supply and meeting of demand in relation to the activitiesreferred to in item (i) over pre-determined time horizons; (iii) to periodically carry out integrated analysis of the security of supplyand meeting of market demand for electricity, natural gas and oil; (iv) to identify difficulties and obstacles which affect or could affect theregularity and security of supply and meeting of demand in relation toexpansion of the electricity, natural gas and oil sectors; and (v) to prepare proposals for adjustments, solutions and recommendations forpreventive actions or actions to maintain or restore security in the supply andmeeting of demands for electrical energy, and to submit them, when appropriate,to the National Energy Policy Council — CNPE.

 

## **Independent PowerProducer**

## ** **

An Independent PowerProducer, or IPP, is a legal entity or a consortium which is granted anauthorization or concession to generate electric energy at its own account andrisk.

 

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 as Free Consumers maychoose their energy supply between generators and traders of electricity.  Currently, such consumers are the ones (i) connectedprior to July 1995 with a demand 

 

A-10

----

 

equal to or greater than3 MW, supplied at a voltage level equal to or greater than 69 kV or (ii) connectedafter July 1995 with a demand equal to or greater than 3 MW, supplied atany voltage level or (iii) that consume between 500kW and 3MW if theychoose to purchasetheir energy from renewable energy sources, such as small hydroelectricfacilities or biomass.

 

Law No. 10,848 prevents distribution companies from sellingpower to Free Consumers at freely negotiated prices.  Supply to captive consumers must be made onlyat regulated rates.  In order to exercisethe option to be a Free Consumer, a consumer that complies with the legalrequirements and does not have a previously agreed term in the contract withthe local distributor must deliver a prior notice to such concessionaire, notexceeding 36 months, unless the distribution concessionaire, at its discretion,agrees to a shorter term.  Law No. 10,848exceptionally allows that, until December 31, 2009, those consumers thatintend to become self-producers of power or even IPPs may do so upon deliveryof a written notice to the supplier, at least 180 days in advance.

 

Additionally, those who choose to be Free Consumers may onlyreturn to the status of captive consumers, i.e., to be once again subject toregulated rates, upon a five-year prior communication to the local distributioncompany, unless such company, at its discretion, agrees to a shorter term.  With the publication of Decree 5,163, of July 30,2004, Free Consumers became subject to penalties if they do not contract all oftheir demand under the so-called “bilateral” contracts.  Also, under the new market rules, FreeConsumers are obliged to join and subscribe to the CCEE.  Presidential Decree 4,413 and ANEEL’sResolution 665, of October and November of 2002, set directives forthe separation of the wholesale supply contracts of large electricity consumerswhose supply voltage is 2.3 kV or higher. Such legislation determined that these large electricity consumers splittheir current supply contracts into three types: (i) a supply agreement, (ii) amain transmission grid connection and use agreement and (iii) adistribution grid connection and use agreement. The deadlines established 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, ANEELestablished new limits on the concentration of certain services and activitieswithin the power industry.  Under theselimits, with the exception of companies participating in the NationalPrivatization Program (which need only comply with such limits once their finalcorporate restructuring is accomplished) no power company (including both itscontrolling and controlled companies) may (1) own more than 20% of Brazil’sinstalled capacity, 25% of the installed capacity of theSouth/Southeast/Central-West region or 35% of the installed capacity of theNorth/Northeast region, except if such percentage corresponds to the installedcapacity of a single generation plant, (2) own more than 20% of Brazil’sdistribution market, 25% of the South/Southeast/Central-West distributionmarket or 35% of the North/Northeast distribution market, except in the eventof an increase in the distribution of electricity exceeding the national orregional growth rates or (3) own more than 20% of Brazil’s trading marketwith final consumers, 20% of Brazil’s trading market with non-final consumersor 25% of the sum of the above percentages.

 

## **Incentives for Alternatives Sources of Power**

## ** **

In 2000, a federal decreecreated the Thermoelectric Priority Program (*ProgramaPrioritário de Termeletricidade*, or PPT), for purposes ofdiversifying the Brazilian energy matrix and decreasing its strong dependencyon hydroelectric plants.  The benefitsgranted to thermoelectric plants under the PPT include (1) guaranteed gassupply for 20 years, (2) assurance of the application of the normativevalue by distribution companies who purchase their electricity for 20 years,according to regulation from ANEEL, thereby assuring that costs related to theacquisition of the electricity produced by thermoelectric plants will betransferred to rates and (3) guaranteed access to a BNDES specialfinancing program for the power industry.

 

In 2002, the ProinfaProgram was established by the Federal Government to create certain incentivesfor the development of alternative sources of energy, such as wind energyprojects, Small Hydroelectric Power Plants and biomass projects.  Under the Proinfa Program, Eletrobrás willpurchase the electricity generated by these alternative sources for a period of20 years.  In its initial phase, theProinfa Program is limited to a total contracted capacity of 3,300 MW.  Projects seeking to qualify for the benefitsoffered by the Proinfa Program must be fully operational by December 31,2006.

 

A-11

----

 

Law 9,427/96, as amendedby Law 10,762/03, further established that hydroelectric plants with installedcapacity 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 was regulated byANEEL through its Resolution 077/2004.

 

## **Regulatory Charges**

## ** **

In certain circumstances,power companies are compensated for assets used in connection with a concessionif the concession is eventually revoked or is not renewed.  In 1971, the Brazilian Congress created aGlobal Reversion Fund (*Reserva Global de Reversão*,or RGR Fund) designed to provide funds for such compensation.  In February 1999, ANEEL revised theassessment of a fee requiring all distributors and certain generators operatingunder public service regimes to make monthly contributions to the RGR Fund atan annual rate equal to 2.5% of the company’s fixed assets in service, but notto exceed 3.0% of total operating revenues in any year.  In recent years, the RGR Fund has been usedprincipally to finance generation and distribution projects.  The RGR Fund is scheduled to be phased out by2010, and ANEEL is required to revise the rate so that the consumer willreceive some benefit from the termination of the RGR Fund.

 

The Federal Governmenthas imposed a fee on IPPs reliant on hydrological resources, except for smallHydroelectric Power Plants and generators under the public services regime,similar to the fee levied on public-industry companies in connection with theRGR Fund.   IPPs are required to makecontributions to the 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 paymentsuntil December 31, 2002.  Allpayments to the UBP Fund since December 31, 2002 are paid directly to theFederal Government.

 

Distribution companiesmust contribute to the Fuel Consumption Account (*Conta deConsumo de Combustível*, 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 rainfall shortage,given the higher marginal operating costs of thermoelectric energy plantscompared to hydroelectric energy plants. Each energy company is required to contribute annually to the CCCAccount.  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 energycompanies for a substantial portion of the fuel costs of their thermoelectricenergy plants.  The CCC Account is administeredby Eletrobrás.

 

In February 1998,the Federal Government provided for the phasing out of the CCC Account.  Subsidies from the CCC Account will be phasedout over a three-year period beginning in 2003 for thermoelectric energy plantsconstructed prior to February 1998 and currently belonging to theInterconnected Power System. Thermoelectric energy plants constructed after that date will not beentitled to subsidies from the CCC Account. In April 2002, the Federal Government established that subsidiesfrom the CCC Account would continue to be paid to those thermoelectric plantslocated in isolated systems for a period of 20 years in order to promotegeneration of electricity in these regions.

 

With the exception ofSmall Hydroelectric Power Plants, all hydroelectric utilities in Brazil mustpay fees to Brazilian states and municipalities for the use of hydrologicalresources.  Such amounts are based on theamount of electricity generated by each utility and are paid to the states andmunicipalities where the plant or the plant’s reservoir is located.

 

In 2002, the FederalGovernment instituted the Energy Development Account (*Conta deDesenvolvimento Energético*, or CDE), which is funded through annualpayments made by concessionaires for the use of public assets, penalties andfines imposed by ANEEL and, since 2003, the annual fees to be paid by agentsoffering electricity to final consumers, by means of a charge to be added tothe rates for the use of the transmission and distribution systems.  These fees are adjusted annually.  The CDE was created to support the (1) developmentof electricity production throughout the country, (2) production ofelectricity by alternative energy sources and (3) universalization ofenergy services throughout Brazil.  TheCDE shall be in effect for 25 years and shall be managed by Eletrobrás.

 

A-12

----

 

The New Industry ModelLaw establishes that the failure to pay the contribution to RGR, ProinfaProgram, the CDE, the CCC Account, or payments due by virtue of purchase ofelectricity in the regulated market or from Itaipu will prevent the non-payingparty from receiving a rate readjustment (except for an extraordinary review)or receiving resources arising from the RGR, CDE or CCC Accounts.

 

## **Energy Reallocation Mechanism**

## ** **

Under the WholesaleEnergy Market, protection from hydrological risks for centrally dispatchedhydrogenerators is provided through an Energy Reallocation Mechanism, or ERM,which attempts to mitigate the risks involved in the generation of hydrologicalelectricity by mandating that hydrogenerators share the hydrological risks ofthe Interconnected Power System. According to Brazilian Law, the revenue arising from the sale of energyby generators does not depend on the energy effectively generated by them, butrather on the Assured Energy (a reference amount of electricity established bythe MME in accordance with studies conducted by the ONS) of each new plant,which is determined by the government in each relevant concessionagreement.  Any imbalances between theenergy actually generated and the Assured Energy 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, theERM reallocated the energy, transferring surplus energy from those whogenerated in excess their Assured Energy to those who generated less than theirAssured 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 be exposed tothe short-term market, paying for the balance at the PLD Price (the DifferencesSettlement Price).

 

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

## ** **

ANEEL oversees rateregulations that govern access to the distribution and transmission systems andestablish rates (i) for the use of the local distribution grid, orDistribution Usage Rates (“TUSD”), and (ii) for the use of theinterconnected transmission grid, or Transmission Usage 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 of improving the national transmissionsystem, and as a result, certain transmission companies have engaged insignificant expansion programs, which have been paid for by increases intransmission rates and charges.  Theincrease in transmission rates and charges paid by distribution concessionairesare passed on to their respective customers through Annual RateAdjustments.  The following is a summaryof each rate or charge:

 

#### *TUSD*

#### * *

The TUSD is paid bygeneration companies and Free Consumers for the use of the distribution systemof the distribution concessionaire to which the relevant generator or FreeConsumer is connected and are revised annually according to an inflation indexand investments made by the distributors in the preceding year for themaintenance and expansion of the grid. The amount to be paid by the user connected to the distribution systemis calculated by multiplying the amount of electricity contracted with thedistribution concessionaire for each connection point, in kW, by the rate inR$/kW which is set by ANEEL.

 

#### *TUST*

#### * *

The TUST is paid bygeneration companies and Free Consumers for the use of the basic transmissiongrid to which they are connected and are revised annually according to aninflation index and the annual revenue of the transmission companies.  According to criteria established by ANEEL,owners of the different parts of the transmission grid have transferred thecoordination of their facilities to the ONS in return for receiving regulatedpayments from the transmission system users. Network users, including generation companies, distribution companiesand Free Consumers, have signed contracts with the ONS entitling them to usethe transmission grid in return for the payment of published rates.  Other parts of the grid that are owned bytransmission companies but which are not considered part of the transmissiongrid are made available directly to the interested users who pay a specifiedfee.

 

A-13

----

 

The TUST is currentlybased on the nodal costs calculated according to the long-range incrementalcosts methodology.  Regulation by ANEELchanged the current criteria for determination of the TUST so that the physicallocation of the users of the transmission grid (near or far from the center ofload) was taken into consideration.  Thischange did not affect CEMIG Generation and Transmission.

 

In accordance with Law 9,648/98 power purchase contracts, knownas Initial Contracts, have being reduced 25% since 2002. With this reductionthe responsibility for payment of the TUST, which was previously paid by thedistribution companies, has been transferred to generation companies.  Generation companies are payingtransmission charges on the basis of the amount of power demand sold tocustomers.  Charges for load will bedetermined on the basis of maximum use of the transmission system duringperiods of peak usage.

 

**ANEEL Inspection Charge**

 

Energy ServicesInspection Charge (TFSEE) was instituted by Law No. 9,427/96 and isregulated by Decree No. 2,410/97. TFSEE is an annual tax calculated based on the type of service(including independent production), and is proportional to the size of theconcession, permission or authorization. The TFSEE is limited to 0.5% of the annual economic benefit earned bythe concessionaire, permit holder or authorized party and must be paid directlyto ANEEL in twelve monthly installments.

 

#### *Distribution*

#### * *

Until early 1993, twoimportant principles dominated the rate-setting process in Brazil: (i) thatelectric utilities should be guaranteed an annual real rate of return of between10% and 12%, known as the guaranteed return, on service-related assets includedin the rate base and (ii) that the rates charged to each class of customerfor electricity should be uniform throughout Brazil, notwithstanding the highcosts of distribution to remote areas of the country.  In cases where the rates set by the FederalGovernment resulted in returns below 10% or above 12%, shortfalls or excesseswere credited or debited to each company’s CRC Account.  In general, until 1975, rates were set at levelsthat afforded the guaranteed return to companies in the sector.  From 1975 through early 1993, however, rateswere fixed at levels that in nearly all cases did not permit electric utilitiesto achieve the guaranteed return because the Federal Government sought to uselower rates to combat inflation.  Thepractical effects of this rate-setting and compensation system were significantfluctuations in real terms in the level of rates during the period and a substantialincrease in the CRC Account balances of most utilities.

 

Legislative changes in1993 abolished the guaranteed return concept and the requirement thatelectricity rates be uniform throughout Brazil. Instead, each utility was to propose a rate structure based on itsparticular circumstances for approval by federal regulatory authorities.  The proposed rate was to be calculated takinginto account the concessionaire’s desired level of remuneration as well as,among other things, operating expenditures, including personnel costs, thecosts of electricity purchased from other concession companies, certainconstruction costs, depreciation and amortization charges, taxes other thanincome taxes and other charges.  Thislegislation abolished the CRC Accounts and permitted concessionaires with positiveCRC Account balances to offset such balances against obligations of suchconcessionaires to the Federal Government, to federal financial institutionsand to other concessionaires in the electricity sector.  In connection with these regulatory reforms, theauthorities granted electric utilities significant real rate increases andestablished a mechanism for automatic adjustments in rates to take account ofinflation.

 

The concession agreementsfor distribution services executed with the Federal Government establish themaximum rates distribution concessionaires are allowed to charge theirconsumers.

 

Distribution rates aresubject to review by ANEEL, which has the authority to adjust and review ratesin response to changes in electricity purchase costs and marketconditions.  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) coststhat are under the control of the distributor, or Parcel B costs.  The rate adjustment is based on a formulathat takes into account the division of costs between the two categories.

 

Parcel A costs include,among others, the following:

 

A-14

----

 

•                                          costs of electricitypurchased for resale pursuant to Initial Contracts;

 

•                                          costs ofelectricity purchased from Itaipu;

 

•                                          costs ofelectricity purchased pursuant to bilateral agreements that are freelynegotiated between parties; and

 

•                                          certain othercharges for the transmission and distribution systems.

 

Parcel B costs aredetermined by subtracting all the Parcel A costs from the distribution company’srevenues.

 

Each distribution company’sconcession agreement provides for an annual rate adjustment (*reajuste anual*).  Ingeneral, Parcel A costs are fully passed through to consumers.  Parcel B costs, however, are restated forinflation in accordance with General Market Price Index (Indice Geral de Preçosdo Mercado), or IGP-M index.

 

Concessionaires ofelectricity distribution are also entitled to periodic revisions (*revisão periódica*) every few years.  These revisions are aimed at (1) assuringnecessary revenues to cover efficient Parcel B operational costs and adequatecompensation for investments deemed essential for the services within the scopeof each such company’s concession and (2) determining the X factor, whichis based on three components: (a) expected gains of productivity fromincrease in scale, (b) evaluations by consumers (verified by ANEEL) and (c) laborcosts.

 

The X factor is used toadjust the proportion of the change in the IGP-M index that is used in theannual adjustments.  Accordingly, uponthe completion of each periodic revision, application of the X factor requiresdistribution companies to share their productivity gains with final consumers.

 

In addition,concessionaires of electricity distribution are entitled to extraordinaryreview of rates (*revisão extraordinária*), on acase by case basis, to ensure their financial equilibrium and compensate themfor unpredictable costs, including taxes, that significantly change their coststructure.

 

## **The New Industry Model Law**

## ** **

The New Industry ModelLaw introduced material changes to the regulation of the power industry with aview to providing incentives to private and public entities to build andmaintain generation capacity that will assure the supply of electricity withinBrazil at low rates through competitive electricity public biddingprocesses.  The key features of the NewIndustry Model Law include:

 

•                                          Creation of two environments for the sale ofenergy 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) or regulatedmarket; 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.

 

•                                          Respect forcontracts executed prior to the New Industry Model Law, in order to provideregulatory stability to transactions carried out before its enactment.

 

A-15

----

 

The New Industry ModelLaw also excluded Eletrobrás and its subsidiaries from the NationalPrivatization Program, which is a program originally created by the FederalGovernment in 1990 with a view to promote the privatization process ofstate-owned companies.

 

***Challenges to theConstitutionality of the New Industry Model Law***

*** ***

The New Industry Model Law is currently being challenged onconstitutional grounds before the Brazilian Supreme Court.  The Federal Government moved to dismiss theactions arguing that the constitutional challenges were moot because theyrelated to a provisional measure that had already been converted into law.  However, on August 4, 2004, theBrazilian Supreme Court denied the government’s motion and decided to hear theactions and rule on their merits.  Afinal decision on this matter is subject to majority vote of the 11 Justices,provided that a quorum of at least eight Justices must be present.  To date, the Brazilian Supreme Court has notreached a final decision and we do not know when such a decision may bereached.  Therefore, the New IndustryModel Law is currently in force. 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 significant portion of our electricitycapacity and needs until 2013, and the pass-through to rates of suchelectricity is expected to continue to be governed by the regulation in effecton the date of the contract.  As such,irrespective of the outcome of the Supreme Court’s decision, we believe that inthe short term, the effects of any such decision on our activities will belimited.  Nevertheless, the exact effectof an unfavorable outcome of the legal proceedings on us is difficult topredict and it could have an adverse impact on our business and results ofoperations.

 

*Coexistenceof Two Electricity**TradingEnvironments.*  Under the NewIndustry Model Law, electricity purchase and sale transactions will be carriedout in two different market segments: (1) the regulated market, or thePool, which contemplates the purchase by distribution companies through publicbids of all electricity necessary to supply their customers and (2) thefree market, which encompasses purchase of electricity by non-regulatedentities (such as the Free Consumers and energy traders).

 

The electricity arising from(1) low capacity generation projects located near the consumption points(such as certain co-generation plants and the Small Hydroelectric PowerPlants), (2) plants qualified under the Proinfa program, as defined below,and (3) Itaipu, will not be subject to the public bidding process for thesupply 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 theItaipu-generated electricity is traded are denominated in U.S. dollars andestablished by ANEEL pursuant to a treaty between Brazil and Paraguay.  As a consequence, Itaipu rates rise or fallin accordance with the variation of the U.S. Dollar/real exchange rate.  Changes in the price of Itaipu-generatedelectricity are, however, subject to the Parcel A cost recovery mechanism.

 

#### *TheRegulated Market (the ACR)*

#### * *

In the regulated market,distribution companies will buy their forecast requirements for electricity fortheir captive consumers from the ACR through tender bids.  The distribution companies will be obliged toacquire electricity from generators through a process administered by ANEEL,whether directly or through the CCEE. Any generator selling in the tender proceedings must sign sale contractswith all the companies of the interlinked grid system.

 

Energypurchases, sold by the ACR in tender proceedings, will take place through twotypes of bilateral contract: (i) Energy QuantityContracts and (ii) Energy Availability Contracts.  Under an Energy Quantity Contract, 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 

 

A-16

----

 

the supply ofelectricity, in which case the generator will be required to purchase theelectricity elsewhere in order to comply with its supply commitments.  Under an Energy Availability Contract, agenerator commits to make a certain amount of capacity available to the ACR.  In this case, the revenue of the generator isguaranteed and the distributors face the risk of a supply shortage.  Together, these agreements comprise theenergy purchase agreements in the ACR (*Contratos deComercialização de Energia no Ambiente Regulado*, or CCEAR).

 

TheCCEARs will allow reductions in the amounts contracted as a function of: (i) up to 4% of the amounts contracted, each year, due to a reduction in themarket projected for the following years; (ii) clientsleaving to migrate to the free environment; and (iii) purchases ofelectricity contracted up to March 15, 2004 (the date of Law 10,848/04).

 

Under the New Industry Model Law, the estimate ofdemand from distributors is the principal factor in determining how muchelectricity the system 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.  Adeviation in actual demand from projected demand could result in penalties to distributors,but this remains subject to implementation.

 

Under the New IndustryModel Law and Decree 5,163 of June 30, 2004, electricity distributioncompanies,provided they accurately forecast their demand, will be allowed to passthrough to the rates chargedto their consumers, all the costs related to electricity which they havepurchased in tender bids, and also any sector charges and taxes related to thetender bids.

 

According to the NewIndustry Model Law, although subject to further regulation, electricitydistribution entities will be entitled to pass through to their respectivecustomers, in the form of higher rates, all costs related to electricity theypurchased through public bids as well as any taxes and industry charges relatedto the public bids.

 

#### *TheFree Market (the “ACL”)*

#### * *

The free market willcover freely negotiated electricity sales between generation concessionaires,IPPs, self-generators, energy traders, importers of energy and FreeConsumers.  The free market will alsoinclude existing bilateral contracts between generators and distributors untilthey expire.  Upon expiration, suchcontracts must be executed under the New Industry Model Law guidelines.

 

A consumer that iseligible to choose its supplier may only be able to rescind its contract withthe local distributor by notifying such distributor up to three years inadvance.

 

Once a consumer has optedfor the free market, it may only return to the regulated system once it hasgiven the distributor of its region five years notice, provided that thedistributor may reduce such term at its discretion.  Such an extended period of notice seeks toassure that, if necessary, the construction of cost efficient new generationcould be finalized in order to supply the re-entry of Free Consumers into theregulated market.  State-owned generatorsmay sell electricity to Free Consumers, but as opposed to private generators,they are obliged to do so through an auction process.

 

Industrial customers 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 its full termination is scheduledfor 2007.  Those consumers purchasing atthe regulated market whose demand exceeds 3MW connected at a voltage equal toor higher than 69 kV if supply began before July 7, 1995 or at any voltageif supply began later, or Potentially Free Consumers, are required to enterinto separate contracts for the connection and use of the transmission ordistribution lines and for the purchase of power.  We believe that Potentially Free Consumerswill migrate to the free market once the subsidy has been phased out and thatthe purchase price of electricity in the free market will continue to be relativelylow due to excess electricity generation in Brazil.  Potentially Free Consumers may elect to optout of our regulated distribution system upon the expiration of theircontracts.

 

A-17

----

 

#### *RestrictedActivities of Distributors*

#### * *

Distributors in theinterconnected Brazilian grid are not permitted to (1) develop activitiesrelated to the generation or transmission of electricity, (2) sellelectricity to Free Consumers, except for those in their concession area andunder the same conditions and rates maintained with respect to captivecustomers in the ACR, (3) hold, directly or indirectly, any interest inany other company, corporation or partnership or (4) develop activitiesthat are unrelated to their respective concessions, except for those permittedby law or in the relevant concession agreement. Generators will not be allowed to hold equity interests in excess of 10%in distributors.  The New Industry ModelLaw has granted a transition period of 18 months for companies to adjust tothese rules, and ANEEL can extend such term for another 18 months in the eventthat companies are unable to comply with such requirements within theprescribed timeframe.

 

#### *Eliminationof Self-Dealing*

#### * *

Since the purchase ofelectricity for captive customers will be performed through the ACR, so-calledself-dealing, when distributors were permitted to meet up to 30% of theirelectricity needs through electricity that was acquired from affiliatedcompanies, is no longer permitted, except in the context of agreements thatwere duly approved by ANEEL before the enactment of the New Industry ModelLaw.  Distributors may, however, makepurchases 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 ModelLaw provides that the contracts executed by electricity distribution companiesand approved by ANEEL before the enactment of the New Industry Model Law willnot be amended to reflect any extension in their terms or modification inprices or volumes of electricity already contracted, with the exception ofInitial Contracts, as described below.

 

During the transitionperiod to a free and competitive energy market (1998-2006) that was establishedby the Power Industry Law, purchases and sales of electricity betweengeneration and distribution concessionaires must occur pursuant to InitialContracts.  The purpose of the transitionperiod was to permit the gradual introduction of competition in the industryand to protect market participants against exposure to potentially volatilespot market prices.

 

Under the Power IndustryLaw, electricity committed to Initial Contracts is reduced by 25% each yearfrom 2002 to 2005.  Generation companieswill be allowed to trade their excess, non-contracted electricity in the ACR orin the free electricity market and may conduct public auctions to trade anynon-contracted volumes with Free Consumers or energy traders.  When the Initial Contracts expire, which isexpected to be in 2005, all electricity will be negotiated in the ACR or in thefree market.

 

***Electricity Purchases under the New Industry Model Law***

*** ***

Decree 5,163/04 provides that all electricity-purchasing agents *(agentes compradores)*must contract all oftheir electricity demand necessary to serve 100% of their markets under theguidelines of the New Industry Model Law. Electricity-selling agents *(agentesvendedores)*must provide evidentiary support linking the allottedenergy to be sold to existing or planned power generation facilities.  Agents that do not comply with suchrequirements are subject to penalties imposed by ANEEL.

 

Beginning in 2005, all electricity distribution companies arerequired to notify MME, by August 1 of each year, of their estimatedelectricity demand for each of the subsequent five years.  In addition, distribution companies will berequired to specify the portion of the amount they intend to contract to supplyits Potentially Free Consumers.

 

The MME will establish the total amount of energy to be traded inthe regulated market and the list of generation facilities that will be allowedto participate in the auctions in each year.

 

A-18

----

 

The new regulations provide for electricity distribution companiesto fulfill their electricity supply obligations primarily through publicauctions, in accordance with the procedures described in “The 2004 Auction” and “Subsequent Auctions” below.

 

In addition to these auctions, a distribution company may purchaseelectricity:  (1) from generationcompanies that are connected directly to the distribution company, (2) fromelectricity generation projects participating in the Proinfa Program, and (3) fromItaipu.

 

*The 2004 Existing Energy Auction*

* *

On December 7, 2004, ANEEL coordinated the conduction by CCEEof the first auction under the procedures and conditions established by the NewIndustry Model Law.

 

Distributors delivered by December 2, 2004 their declarationof estimated contracting demand for the next five years (including a portionrelated to the Potentially Free Consumers). Based on these declarations, the MME established the total amount ofenergy to be traded in the 2004 auction. The auction was held in two phases, through an electronic system.

 

In the first phase, negotiations took place in multiple rounds, ineach of which energy sellers offered blocks of energy (*blocos de energia*) at a specific price(the current price) to be delivered within a proposed time.  The sizes of the**blocks of energy and their respective delivery times wereset in advance by the MME.  The firstphase ceased when no offers to sell were made in a round and the current priceswere equal to or lower than the reserve prices.

 

The second phase had a single round, in which sellers that madevalid offers in the first phase could make new offers for each block of energy.

 

Following the conclusion of the 2004 auction, the distributioncompanies and sellers executed CCEARs setting forth the terms, conditions,prices and contracted amounts of electricity. The distributor was also required to provide security interests inconnection with the CCEARs.  Generally,the seller will be granted an interest in receivables in an amount equal to110.0% of the average amount of the last three invoices under the CCEAR.

 

During the auction, a total of 17,008 MW were sold, correspondingto 96.0% of the distribution companies’ total demand, of which 9,054 MW weresold at an average price of R$57.51/MWh for eight-year contracts beginning in2005; 6,782 MW were sold at an average price of R$67.33/MWh for eight-yearcontracts beginning in 2006; and 1,172 MW were sold at an average price ofR$75.46/MWh for eight-year contracts beginning in 2007.

 

We sold 65,008,656 MWh through our generation company at anaverage price of R$69.58/MWh for eight-year contracts beginning in 2006 andacquired 37,180,042 MWh at an average price of R$57.51/MWh for eight-yearcontract beginning in 2005; and 64,457,335 MWh at an average price ofR$67.33/MWh for eight-year contracts beginning in 2006.

 

The security interestsoffered by the distributors to the generators in connection with the CCEARs areusually in the form of receivables or bank certificates of deposit.  In a few cases, bank guarantees have beenused.

 

#### *The 2005 Existing Energy Auction*

#### * *

In April 2005, thesecond electricity auction under the New Industry Model Law for the electricitysector was held.  In this auction, CemigDistribution and Cemig Generation and Transmission made electricity purchaseand sale contracts.

 

During the auction, a total of****1,325****MWwere sold, corresponding to only****42%****of the energy initially foreseen by theMME for 2008, at an average price of R$83.13/MWh for eight-year contractsbeginning in 2008.  The energy to be soldwith delivery initiating in 2009 was automatically excluded from the auction inaccordance with the rules determined by MME, as the price for this productduring the auction reached a value that was below 

 

A-19

----

 

the market expectations.  By the end of 2005, the MME is expected topresent a solution under which the distributors can achieve the contracting of100% of their energy demand from 2008 to 2010.

 

Cemig Distributionpurchased, to serve its market, 105 average MW in contracts with eight-yearterms, with the supply starting on January 1, 2008, at an average price ofR$83.13/MWh. The contracts were signed with 10 companies holding generationconcessions, including Cemig Generation and Transmission.

 

In the same auction,Cemig Generation and Transmission sold 105 average MW in contracts witheight-year terms, with the supply beginning on January 1, 2008.  The sale price of the electricity isR$83.50/MWh. The contracts were signed with 34 distributors, including CemigDistribution, which serve consumers in all the regions of the Braziliannational grid system

 

*Subsequent Auctions*

* *

Electricity auctions for new generation projects will be held (1) fiveyears before the initial delivery date (referred to as “A-5” auctions), and (2) threeyears before the initial delivery date (referred to as “A-3” auctions).  There will also be electricity auctions fromexisting power generation facilities (1) held one year before the initialdelivery date (referred to as “A-1” auctions) and (2) held no longer thanfour months before the delivery date (referred to as “market adjustments”).  The invitations to bid in the auctions willbe prepared by ANEEL, in compliance with guidelines established by the MME.

 

Each generation company that succeeds in the auctions will executea power purchase agreement with each distribution company, in proportion to thedistribution companies’ respective estimated demand for electricity.  The only exception to these rules relateto the market adjustment auction, where the contracts will be between specificselling and distribution companies.  TheCCEAR of both “A-5” and “A-3” auctions will have a term of between 15 and 30years, and the CCEAR of “A-1” auctions will have a term between five and 15years.  Contracts arising from marketadjustment auctions will be limited to a two-year term.

 

***Reduction of the Level of Contracted Electricity***

*** ***

Decree No. 5,163/04, which regulates the trade of electricityunder the 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 ofcontracted electricity will occur will be duly set forth in the CCEARs, and maybe exercised at the sole discretion of the distribution company and incompliance with the provisions described above and ANEEL regulations.

 

***Limitation on Pass-Through***

*** ***

The rules also limit the pass-through of costs of electricityto final customers.  The Annual ReferenceValue corresponds to the weighted average of the electricity prices in the “A-5”and “A-3” auctions, calculated for all distribution companies, and creates anincentive for distribution companies to contract for their expected electricitydemands in the “A-5” auctions, where the prices are expected to be lower thanin “A-3” auctions.  The Annual ReferenceValue will be applied in the first three years of the power purchase agreementsfrom new power generation projects. After the fourth year, the electricity acquisition costs from theseprojects will be allowed to be fully passed-through.  The decree establishes the followinglimitations on the ability of distribution companies to pass through costs tocustomers:

 

•                                          nopass-through of costs for electricity purchases that exceed 103% of actualdemand;

 

A-20

----

 

•                                          limitedpass-through of costs for electricity purchases made in an “A-3” auction, ifthe volume of the acquired electricity exceeds 2.0% of the demand verified in “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;

 

•                                          from 2006 to 2009,electricity purchases from existing facilities in the “A-1” auction is limitedto 1.0% of distribution companies’ demand. If the acquired electricity in the “A-1” auction exceeds 1.0%,pass-through of costs of the exceeding portion to final customers is limited to70.0% of the average value of such acquisition costs of electricity generatedby existing generation facilities.  TheMME will establish the maximum acquisition price for electricity generated byexisting projects; and

 

•                                          ifdistributors do not 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.

 

#### *Rationingunder the New Industry Model Law*

#### * *

The New Industry ModelLaw establishes that, in a situation where the Federal Government decrees acompulsory reduction in the consumption of electricity in a certain region, allenergy amount agreements in the regulated market, registered within the CCEE inwhich the buyer is located, shall have their volumes adjusted in the sameproportion to the consumption reduction.

 

## **Environmental Regulations**

## ** **

Brazilian environmentallegislation requires that environmental licenses must be obtained wherever thereis construction, installation, expansion or operation of any undertaking thatuses natural resources, causes environment degradation, pollutes or has thepotential to cause degradation or pollution to the environment.

 

New generation,transmission or distribution projects or activities that expand the electricitysector require a series of environmental procedures to be complied with.  Environmental impact studies are prepared bymulti-disciplinary teams, which analyze the environmental impact and proposesolutions to minimize the effects of these projects on the environment.

 

The environmental impactstudies are then submitted to the federal or state authorities for examination,and also, in public hearings, to the population of the communities affected bythe project.

 

The process of licensingof undertakings with significant environmental impact follows a three-phaseprocedure, in which the following 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 followingundertakings, the application must be made to the federal environmental body:

 

•                                          those locatedon international borders or developed in conjunction with an adjoining country,or in territorial waters, on the continental shelf, in an exclusive economiczone, on indigenous lands or in federal protected areas;

 

•                                          locations ordevelopments in more than one Brazilian state;

 

A-21

----

 

•                                          where thedirect environmental impacts surpass the country’s territorial limits or thelimit of one or more Brazilian state; or

 

•                                          whereradioactive material is involved, or nuclear energy used.

 

Applications for thefollowing types of project have to be made to the environmental bodies of therelevant Brazilian state:

 

•                                          those locatedor developed in more than one municipality, or in state or Federal Districtconservation areas;

 

•                                          those locatedor developed in forests or other forms of natural vegetation subject topermanent preservation;

 

•                                          those whosedirect 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 municipalenvironmental body, after acquiring a position statement from the competentbodies of the federal government, and the states or Federal District, asapplicable, gives the environmental license for projects and activities withlocal environmental impact, and for any which are delegated by the state, bylegal instrument or agreement.

 

Finally, projects withsignificant environmental impact are obliged by law to allocate a minimum of0.5% of their total investment costs to environmental compensation.

 

A-22

----

 
| *** *** | ***Companhia Energética de Minas  Gerais — CEMIG***                                                                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                      |
| * *     | *Financial  Statements as of December 31, 2004 and 2003 and for the Years Ended December 31,  2004, 2003 and 2002 and Report of Independent Registered Public Accounting  Firm* |
| * *     | * *                                                                                                                                                                                  |

 

----

 

REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

 

 

Tothe Board of Directors and Shareholders of

 

Companhia Energética de Minas Gerais – CEMIGBelo Horizonte – MG, Brazil

 

 

We have audited theaccompanying consolidated balance sheets of COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG (a Brazilian corporation) and its subsidiaries (the “Company”)as of December 31, 2004 and 2003, and the related consolidated statementsof operations and comprehensive income (loss), changes in shareholders’ equityand cash flows for each of the three years in the period ended December 31,2004, all expressed in Brazilian *reais*.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Our audit included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theconsolidated financial position of CompanhiaEnergética de Minas Gerais – CEMIG and its subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| May 17,  2005            |
|-------------------------------|
|                          |
|                          |
| /s/ Deloitte  Touche Tohmatsu |   |

 

F-2

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

 

**(Expressed in millions of Brazilian *reais*)**

 

**ASSETS**

 
| ** **                                                                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| CURRENT ASSETS:                                                                                    |       |                  |       |   |   |
| Cash and cash equivalents (note 6)                                                                 |       | 874                   |       | 440 |   |
| Restricted investments (note 7)                                                                    |       | —                |       | 72 |   |
| Accounts receivable, net (note 8)                                                                  |       | 1,183                 |       | 1,050 |   |
| Accounts receivable - use of basic transmission  network                                           |       | 28                    |       | 29 |   |
| Deferred regulatory assets (note 4)                                                                |       | 836                   |       | 633 |   |
| Deferred income taxes benefits (note 5)                                                            |       | 149                   |       | 114 |   |
| Recoverable taxes (note 9)                                                                         |       | 108                   |       | 108 |   |
| Materials and supplies                                                                             |       | 19                    |       | 22 |   |
| Receivable from Federal Government in respect of  bonus paid and rationing adoption costs incurred |       | —                |       | 9 |   |
| Receivable from Federal Government related to  low-income consumers                                |       | 9                     |       | 40 |   |
| Other                                                                                              |       | 160                   |       | 113 |   |
|                                                                                               |       | 3,366                 |       | 2,630 |   |
|                                                                                               |       |                  |       |   |   |
| INVESTMENTS (note 10)                                                                              |       | 128                   |       | 12 |   |
|                                                                                               |       |                  |       |   |   |
| PROPERTY, PLANT AND EQUIPMENT, NET (note 11)                                                       |       | 11,191                |       | 10,917 |   |
|                                                                                               |       |                  |       |   |   |
| OTHER ASSETS:                                                                                      |       |                  |       |   |   |
| Deferred regulatory assets (note 4)                                                                |       | 2,929                 |       | 2,069 |   |
| Account receivable from Minas Gerais State  Government (note 3)                                    |       | 1,097                 |       | 891 |   |
| Recoverable taxes (note 9)                                                                         |       | 141                   |       | 116 |   |
| Accounts receivable, net (note 8)                                                                  |       | 78                    |       | 91 |   |
| Deferred income taxes benefits (note 5)                                                            |       | 165                   |       | 175 |   |
| Restricted investments (note 7)                                                                    |       | 20                    |       | 60 |   |
| Receivable from Federal Government in respect of  bonus paid and rationing adoption costs incurred |       | —                |       | 23 |   |
| Other                                                                                              |       | 137                   |       | 135 |   |
|                                                                                               |       | 4,567                 |       | 3,560 |   |
| Total assets                                                                                       |       | 19,252                |       | 17,119 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-3

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

 

**(Expressed in millions of Brazilian *reais*, except share amounts)**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
| CURRENT LIABILITIES:                                                                                                  |       |                  |       |   |   |
| Accounts payable to suppliers (note 12)                                                                               |       | 648                   |       | 618 |   |
| Payroll and related charges                                                                                           |       | 189                   |       | 199 |   |
| Taxes payable (note 13)                                                                                               |       | 480                   |       | 321 |   |
| Dividends and interest on capital                                                                                     |       | 470                   |       | 241 |   |
| Current portion of long-term financing (note 14)                                                                      |       | 1,417                 |       | 1,660 |   |
| Regulatory charges payable (note 15)                                                                                  |       | 155                   |       | 134 |   |
| Employee post-retirement benefits (note 16)                                                                           |       | 200                   |       | 185 |   |
| Employee profit sharing                                                                                               |       | 63                    |       | 51 |   |
| Other                                                                                                                 |       | 171                   |       | 120 |   |
|                                                                                                                  |       | 3,793                 |       | 3,529 |   |
| LONG-TERM LIABILITIES:                                                                                                |       |                  |       |   |   |
| Long-term financing (note 14)                                                                                         |       | 2,750                 |       | 2,331 |   |
| Employee post-retirement benefits (note 16)                                                                           |       | 1,606                 |       | 1,023 |   |
| Deferred income taxes (note 5)                                                                                        |       | 874                   |       | 798 |   |
| Accrued liability for contingencies (note 17)                                                                         |       | 414                   |       | 354 |   |
| Accounts payable to suppliers (note 12)                                                                               |       | 246                   |       | 325 |   |
| Taxes payable (note 13)                                                                                               |       | 166                   |       | 100 |   |
| Other                                                                                                                 |       | 173                   |       | 108 |   |
|                                                                                                                  |       | 6,229                 |       | 5,039 |   |
|                                                                                                                  |       |                  |       |   |   |
| MINORITY INTEREST                                                                                                     |       | 21                    |       | 27 |   |
| SHAREHOLDERS’ EQUITY: (note 18)                                                                                  |       |                  |       |   |   |
| Capital stock -                                                                                                       |       |                  |       |   |   |
| Preferred – 91,210,523 thousand shares authorized,  issued and outstanding as of December 31, 2004 and 2003 |       | 804                   |       | 804 |   |
| Common – 70,874,168 thousand shares authorized,  issued and outstanding as of December 31, 2004 and 2003    |       | 624                   |       | 624 |   |
|                                                                                                                  |       | 1,428                 |       | 1,428 |   |
| Additional paid-in capital                                                                                            |       | 3,170                 |       | 3,170 |   |
| Appropriated retained earnings                                                                                        |       | 2,693                 |       | 2,693 |   |
| Unappropriated retained earnings                                                                                      |       | 2,449                 |       | 1,290 |   |
| Accumulated other comprehensive loss                                                                                  |       | (531                  | )          | (57 | ) |
|                                                                                                                  |       | 9,209                 |       | 8,524 |   |
| Total liabilities and shareholders’ equity                                                                       |       | 19,252                |       | 17,119 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-4

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS – CEMIG**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31,2004, 2003 AND 2002**

 

**(Expressed in millions of Brazilian *reais*, except share and per share amounts)**

 
| ** **                                                                                                                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| NET OPERATING REVENUES:                                                                                                                                                           |       |                              |       |   |   |   |   |
| Electricity sales to final customers (note 19)                                                                                                                                    |       | 8,561                             |       | 7,179 |   | 5,458 |   |
| Regulatory extraordinary rate adjustment (note 4)                                                                                                                                 |       | 89                                |       | 63 |   | 281 |   |
| Deferred rate adjustment (note 4)                                                                                                                                                 |       | 640                               |       | 199 |   | — |   |
| Electricity sales to the interconnected power system  (note 19)                                                                                                                   |       | 36                                |       | 56 |   | 161 |   |
| Use of basic transmission network                                                                                                                                                 |       | 245                               |       | 257 |   | 185 |   |
| Other operating revenues (note 19)                                                                                                                                                |       | 536                               |       | 468 |   | 260 |   |
| Taxes on revenues (note 19)                                                                                                                                                       |       | (2,453                            | )          | (2,190 | ) | (1,473 | ) |
| Total net operating revenues                                                                                                                                                      |       | 7,654                             |       | 6,032 |   | 4,872 |   |
| OPERATING COSTS AND EXPENSES:                                                                                                                                                     |       |                              |       |   |   |   |   |
| Electricity purchased for resale (note 20)                                                                                                                                        |       | (1,477                            | )          | (1,396 | ) | (1,333 | ) |
| Natural gas purchased for resale                                                                                                                                                  |       | (268                              | )          | (246 | ) | (152 | ) |
| Use of basic transmission network                                                                                                                                                 |       | (586                              | )          | (310 | ) | (298 | ) |
| Depreciation and amortization                                                                                                                                                     |       | (677                              | )          | (686 | ) | (666 | ) |
| Personnel (note 20)                                                                                                                                                               |       | (788                              | )          | (710 | ) | (532 | ) |
| Regulatory charges (note 20)                                                                                                                                                      |       | (861                              | )          | (585 | ) | (548 | ) |
| Third-party services                                                                                                                                                              |       | (329                              | )          | (325 | ) | (265 | ) |
| Employee post-retirement benefits (note 16)                                                                                                                                       |       | (153                              | )          | (109 | ) | (207 | ) |
| Materials and supplies                                                                                                                                                            |       | (83                               | )          | (88 | ) | (78 | ) |
| Gain on Gasmig Sale                                                                                                                                                               |       | 102                               |       | — |   | — |   |
| Other (note 20)                                                                                                                                                                   |       | (407                              | )          | (422 | ) | (238 | ) |
| Reversion (provision) for loss on deferred regulatory  assets (note 4)                                                                                                            |       | (9                                | )          | 174 |   | (28 | ) |
| Total operating costs and expenses                                                                                                                                                |       | (5,536                            | )          | (4,703 | ) | (4,345 | ) |
| Operating income                                                                                                                                                                  |       | 2,118                             |       | 1,329 |   | 527 |   |
|                                                                                                                                                                              |       |                              |       |   |   |   |   |
| FINANCIAL INCOME (EXPENSES), NET (note 21)                                                                                                                                        |       | 350                               |       | 674 |   | (525 | ) |
| Income before income taxes and minority interests                                                                                                                                 |       | 2,468                             |       | 2,003 |   | 2 |   |
| INCOME TAXES - (EXPENSE) BENEFIT: (note 5)                                                                                                                                        |       |                              |       |   |   |   |   |
| Current                                                                                                                                                                           |       | (543                              | )          | (224 | ) | (187 | ) |
| Deferred                                                                                                                                                                          |       | (188                              | )          | (383 | ) | 161 |   |
|                                                                                                                                                                              |       | (731                              | )          | (607 | ) | (26 | ) |
| MINORITY INTERESTS                                                                                                                                                                |       | 2                                 |       | — |   | 12 |   |
| NET INCOME (LOSS)                                                                                                                                                                 |       | 1,739                             |       | 1,396 |   | (12 | ) |
| OTHER COMPREHENSIVE INCOME (LOSS):                                                                                                                                                |       |                              |       |   |   |   |   |
| Unrealized holding gains (losses) on  available-for-sale securities                                                                                                               |       |                              |       |   |   |   |   |
| Unrealized holding gains arising during period                                                                                                                                    |       | 66                                |       | (17 | ) |   |   |
| Less: reclassification adjustment for gains included  in net income                                                                                                               |       | —                            |       | (76 | ) | — |   |
| Minimum pension liability adjustment (note 16)                                                                                                                                    |       | (717                              | )          | (87 | ) | 378 |   |
| Deferred income taxes (expense) benefits                                                                                                                                          |       | 243                               |       | 33 |   | (119 | ) |
|                                                                                                                                                                              |       | (474                              | )          | (64 | ) | 242 |   |
| COMPREHENSIVE INCOME                                                                                                                                                              |       | 1,265                             |       | 1,332 |   | 230 |   |
| Weighted average number of common and preferred shares  outstanding during the year (thousand) for purposes of calculating basic and  diluted earnings (loss) per thousand shares |       | 162,084,691                       |       | 162,084,691 |   | 161,033,699 |   |
| Basic and diluted earnings (loss) per thousand  common and preferred shares - In Brazilian  *reais*                                                                               |       | 10.73                             |       | 8.61 |   | (0.07 | ) |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-5

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2004, 2003AND 2002**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                          | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| CAPITAL STOCK:                                                      |       |                              |       |   |   |   |   |
| Preferred -                                                         |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | 804                               |       | 804 |   | 786 |   |
| Transfer from appropriated retained earnings                        |       | —                            |       | — |   | 18 |   |
| Balance, end of year                                                |       | 804                               |       | 804 |   | 804 |   |
|                                                                |       |                              |       |   |   |   |   |
| Common -                                                            |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | 624                               |       | 624 |   | 610 |   |
| Transfer from appropriated retained earnings                        |       | —                            |       | — |   | 14 |   |
| Balance, end of year                                                |       | 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-                                |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | 45                                |       | 45 |   | 45 |   |
| Transfer from unappropriated retained earnings                      |       | —                            |       | — |   | — |   |
| Balance, end of year                                                |       | 45                                |       | 45 |   | 45 |   |
| Rate shortfall reserve-                                             |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | 2,648                             |       | 2,648 |   | 2,680 |   |
| Transfer to capital stock                                           |       | —                            |       | — |   | (32 | ) |
| Balance, end of year                                                |       | 2,648                             |       | 2,648 |   | 2,648 |   |
| Unrealized income reserve-                                          |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | —                            |       | — |   | 314 |   |
| Transfer to unappropriated retained earnings                        |       | —                            |       | — |   | (314 | ) |
| Balance, end of year                                                |       | —                            |       | — |   | — |   |
| Legal reserve-                                                      |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | —                            |       | — |   | 94 |   |
| Transfer to unappropriated retained earnings                        |       | —                            |       | — |   | (94 | ) |
| Balance, end of year                                                |       | —                            |       | — |   | — |   |
|                                                                |       | 2,693                             |       | 2,693 |   | 2,693 |   |
| UNAPPROPRIATED RETAINED EARNINGS:                                   |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | 1,290                             |       | 144 |   | 79 |   |
| Net income (loss)                                                   |       | 1,739                             |       | 1,396 |   | (12 | ) |
| Transfer from appropriated retaining earnings                       |       | —                            |       | — |   | 408 |   |
| Dividends and interest on capital                                   |       | (580                              | )          | (250 | ) | (331 | ) |
| Balance, end of year                                                |       | 2,449                             |       | 1,290 |   | 144 |   |
|                                                                |       |                              |       |   |   |   |   |
| ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):                      |       |                              |       |   |   |   |   |
| Balance, beginning of year                                          |       | (57                               | )          | 7 |   | (235 | ) |
| Unrealized holding gains arising during period                      |       | —                            |       | 44 |   | — |   |
| Less: reclassification adjustment for gains included  in net income |       | —                            |       | (51 | ) | — |   |
| Other comprehensive income (loss)                                   |       | (474                              | )          | (57 | ) | 242 |   |
| Balance, end of year                                                |       | (531                              | )          | (57 | ) | 7 |   |
| Shareholders’ equity at end of year                            |       | 9,209                             |       | 8,524 |   | 7,442 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-6

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2004, 2003AND 2002**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                                                                                                 | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                      |       |                              |       |   |   |   |   |
| Net income (loss)                                                                                                                          |       | 1,739                             |       | 1,396 |   | (12 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities                                                   |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                                                                              |       | 677                               |       | 686 |   | 666 |   |
| Deferred regulatory assets and liabilities                                                                                                 |       | (598                              | )          | (67 | ) | (432 | ) |
| Monetary variation and exchange rate variation loss  (gain)                                                                                |       | (627                              | )          | (766 | ) | 342 |   |
| Loss on disposal of property, plant and equipment                                                                                          |       | 29                                |       | 61 |   | 42 |   |
| Employee post-retirement benefits                                                                                                          |       | (118                              | )          | (152 | ) | 24 |   |
| Provision for contingencies and doubtful accounts  receivable                                                                              |       | 146                               |       | 117 |   | 45 |   |
| Provision (reversal) for loss on deferred regulatory  assets                                                                               |       | 9                                 |       | (174 | ) | 28 |   |
| Deferred income taxes                                                                                                                      |       | 188                               |       | 383 |   | (161 | ) |
| Gain on sale of Gasmig                                                                                                                     |       | (102                              | )          | — |   | — |   |
| Other                                                                                                                                      |       | (31                               | )          | 15 |   | (38 | ) |
|                                                                                                                                       |       |                              |       |   |   |   |   |
| Decrease (increase) in operating assets-                                                                                                   |       |                              |       |   |   |   |   |
| Accounts receivable                                                                                                                        |       | (196                              | )          | (316 | ) | (410 | ) |
| Recoverable taxes                                                                                                                          |       | (25                               | )          | (121 | ) | 38 |   |
| Account receivable from State Government                                                                                                   |       | 49                                |       | 28 |   | — |   |
| Receivable from Federal Government in respect of  bonus paid and rationing adoption costs incurred, net of surcharge applied to  consumers |       | —                            |       | 20 |   | 45 |   |
| Other                                                                                                                                      |       | 117                               |       | (40 | ) | (129 | ) |
|                                                                                                                                       |       |                              |       |   |   |   |   |
| Increase (decrease) in operating liabilities-                                                                                              |       |                              |       |   |   |   |   |
| Accounts payable to suppliers                                                                                                              |       | (101                              | )          | (723 | ) | 289 |   |
| Payroll and related charges                                                                                                                |       | (25                               | )          | 91 |   | 11 |   |
| Taxes payable                                                                                                                              |       | 240                               |       | 198 |   | 125 |   |
| Regulatory charges payable                                                                                                                 |       | 21                                |       | 40 |   | 42 |   |
| Advance billings of electric power                                                                                                         |       | —                            |       | — |   | (42 | ) |
| Accrued interest on long-term financing and  short-term loans                                                                              |       | 3                                 |       | (111 | ) | 253 |   |
| Other                                                                                                                                      |       | 143                               |       | 93 |   | 6 |   |
| Net cash provided by operating activities                                                                                                  |       | 1,538                             |       | 658 |   | 732 |   |
|                                                                                                                                       |       |                              |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                       |       |                              |       |   |   |   |   |
| Restricted investments                                                                                                                     |       | —                            |       | 62 |   | 426 |   |
| Proceeds from sale of Gasmig                                                                                                               |       | 154                               |       | — |   | — |   |
| Sale of marketable securities                                                                                                              |       | —                            |       | 119 |   | — |   |
| Acquisition of new investments                                                                                                             |       | (10                               | )          | (4 | ) | (103 | ) |
| Acquisition of property, plant and equipment                                                                                               |       | (1,061                            | )          | (1,029 | ) | (869 | ) |
| Net cash used in investing activities                                                                                                      |       | (917                              | )          | (852 | ) | (546 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                      |       |                              |       |   |   |   |   |
| Proceeds from issuance of long-term financing                                                                                              |       | 1,230                             |       | 717 |   | 518 |   |
| Repayment of long-term financing and short-term  loans                                                                                     |       | (1,424                            | )          | (826 | ) | (597 | ) |
| Advance from minority shareholder for future capital  increase in subsidiary                                                               |       | —                            |       | — |   | 12 |   |
| Proceeds from short-term loans                                                                                                             |       | 316                               |       | 820 |   | — |   |
| Dividends and interest on capital paid                                                                                                     |       | (309                              | )          | (200 | ) | (214 | ) |
| Net cash provided by (used in) financing activities                                                                                        |       | (187                              | )          | 511 |   | (281 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                       |       | 434                               |       | 317 |   | (95 | ) |
|                                                                                                                                       |       |                              |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                                                                                 |       |                              |       |   |   |   |   |
| Beginning of the year                                                                                                                      |       | 440                               |       | 123 |   | 218 |   |
| End of the year                                                                                                                            |       | 874                               |       | 440 |   | 123 |   |
|                                                                                                                                       |       | 434                               |       | 317 |   | (95 | ) |
|                                                                                                                                       |       |                              |       |   |   |   |   |
| SUPPLEMENTARY CASH FLOWS DISCLOSURE:                                                                                                       |       |                              |       |   |   |   |   |
| Taxes paid - income taxes                                                                                                                  |       | 225                               |       | 169 |   | 42 |   |
| Interest paid, net of interest capitalized                                                                                                 |       | 383                               |       | 405 |   | 285 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-7

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2004, 2003 AND 2002**

 

**(Amounts expressed in millions of Brazilian *reais*, unless otherwise indicated)**

 

**1. THE COMPANY AND ITS OPERATIONS**

 

(a) The Company:

 

Companhia Energética deMinas Gerais – CEMIG (“CEMIG” or the “Company”), a partly state-owned company,organized under the laws of the Federative Republic of Brazil (“Brazil”) andpublicly traded, is an electric power public utility concessionaire controlledby the Government of the State of Minas Gerais, Brazil (the “State Government”).Its principal activities are the construction and operation of systems used inthe production, transformation, transmission, distribution and sale of electricenergy, as well as in certain related business activities.

 

As a concessionaire ofelectric utility services, the Company is subject to regulations set by theAgência Nacional de Energia Elétrica (the Brazilian National Electric EnergyAgency or “ANEEL”), an agency of the Brazilian Federal Government (the “FederalGovernment”).

 

The Company has equityinterests in the following operating companies as of December 31, 2004:

 

•                  Sá Carvalho S.A. (“Sá Carvalho”)(100.00% interest) - Its principal activities are the generation and sale ofelectric energy from the Sá Carvalho hydroelectric power plant, as an electricenergy public service concessionaire.

 

•                  Usina Térmica Ipatinga S.A. (“Ipatinga”)(100.00% interest) - Its principal activities are the 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.

 

•                  Companhia de Gás de Minas Gerais -GASMIG (“GASMIG”) (55.19% interest) - Its principal activities are theacquisition, 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. CEMIG sold40.00% of its interest in GASMIG in December 2004, as mentioned in Note10.

 

•                  Empresa de Infovias S.A. (99.93%interest) - Its principal activities are rendering telecommunications servicesand developing activities related thereto, through multiservice networks usingoptical fiber cable, coaxial cable and other electronic equipment. Empresa deInfovias S.A. 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. Empresa de Infovias S.A. began operations in January 2001 and itssubsidiary WAY TV Belo Horizonte S.A. began operations in 2002.  These businesses are considered strategic forCEMIG’s existing infrastructure.  Thetelecommunications business will require additional investments to beconsidered complete and competitive. Periodic evaluations of Empresa de Infovias S.A. and WAY TV areperformed in order to determine their ability to run their businesses on astand-alone and profitable basis, as well as to determine the need for animpairment reserve for the assets of this subsidiary. Currently availableprojections did not reveal the need for such an impairment reserve.

 

F-8

----

 

•                  Efficientia S.A. (“Efficientia”)(100.00% interest) - Its principal activities are rendering efficiency,optimization and energy solutions services through studies and carrying out ofprojects, as well as providing operating and maintenance services, to energysupply facilities.

 

•                  Horizontes Energia S.A. (“Horizontes”)(100.00% interest) - Its principal activities are the 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.

 

•                  Central Termelétrica de CogeraçãoS.A. (“Cogeração”) (48.50% interest) – Its principal activities are thegeneration and sale of electric energy, as an independent power producer,through the construction and operation of the Barreiro thermoelectric powerplant, located on Vallourec & Mannesmann Tubes’s facilities, in theMinas Gerais State.

 

•                  Rosal Energia S.A. (“Rosal”) (100.00%interest) – Its principal activities are the 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. The plant was acquired in 2004, as mentioned in note 10.

 

CEMIGalso has an interest in the following development-stage companies as of December 31,2004:

 

•                  Cemig Geração e Transmissão S.A. (“CemigGeneration and Transmission”) (100.00% interest) -  Its principal activities are the generationand transmition of electric energy as an electric energy public serviceconcessionaire.

 

•                  Cemig Distribuição S.A. (“CemigDistribution”) (100.00% interest) - Its principal activities are thedistribution of electric energy as an electric energy public serviceconcessionaire.

 

•                  Cemig PCH S.A., Cemig Capim BrancoEnergia S.A. and UTE Barreiro S.A. (100.00% interest) – Their principalactivities will be the generation and sale of electric energy, as independentpower producers.

 

•                  Cemig Trading S.A. (100.00% interest)– Its principal activities will be related to the purchase and sale of energy.

 

•                  Companhia de Transmissão Centroestede Minas (51.00% interest) – This company will be responsible for constructingand operating the 345 Kv transmission line LT Furnas – Pimenta.

 

•                  Central Hidrelétrica Pai Joaquim S.A.(48.50% interest) – Its principal activities will be the generation and sale ofelectric energy, as an independent power producer.

 

•                  Companhia Transleste de Transmissão(25.00% interest) – This company will be responsible for constructing andoperating the 345 Kv transmission line connecting the substation located inMontes Claros and the substation of the Irapé Hydroelectric Power Plant.

 

•                  Companhia Transudeste de Transmissão(24.00% interest) – This company will be responsible for constructing andoperating the 345 Kv transmission line LT Itutinga – Juiz de Fora.

 

•                  Companhia Transirapé de Transmissão(24.40% interest) – This company will be responsible for constructing andoperating the 230 Kv transmission line LT Irapé – Araçuaí 230 Kv.

 

(b) The electricitysector in Brazil:

 

The electricity sector inBrazil is regulated by the Federal Government, acting through its Ministry ofMines and Energy, which has exclusive authority over the electricity sector.Regulatory policy for the sector is implemented by ANEEL.

 

F-9

----

 

Retail electricity salesby the Company are made pursuant to provisions of its long-term electricitysales concession agreements. Under the terms of the concession agreements, theCompany is authorized to charge its customers a rate for electricity supplythat consists of two components: (1) a non-controllable energy generation,transmission and distribution cost pass-through component (“Parcel A costs”);and (2) an operating cost component (“Parcel B costs”). Both componentsare established as part of the original concession for certain initialperiods.  Subsequent to the initialperiods, and at regular intervals thereafter, ANEEL has the authority to reviewthe costs of the Company to determine the inflation adjustment (or othersimilar adjustment factor), if any, to the Parcel B costs (the “AdjustmentEscalator”) for the subsequent period. This review can result in an AdjustmentEscalator 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 adjustmentsarising from significant events which disrupt the economic and financialequilibrium of its business. Other normal or recurring factors (such asincreases in purchased power costs, taxes on revenue generated or localinflation) are also allowed to be offset through specific rate increases. Whenmaking a request for such a rate increase, the Company is required to prove thefinancial impact of the cited events, and there can be no assurance that therequested adjustments will be granted.

 

See further references toregulatory changes in notes 2 and 4.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

In preparing financialstatements in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”), management is required to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could vary from these estimates. The Company’s financialstatements therefore include various estimates concerning (i) therecoverability of deferred regulatory assets, (ii) valuation allowancesfor accounts receivable, deferred tax assets and the account receivable fromthe State Government, (iii) the useful lives of property, plant andequipment and consortia, (iv) provisions necessary for contingent losses,and (v) estimates of employee post-retirement benefit obligations andother similar estimates.

 

(a)          Basisof presentation — The financial statements have been prepared in accordancewith U.S. GAAP, which differ in certain respects from the Company’s statutoryfinancial statements prepared in accordance with the accounting practicesadopted in Brazil, which are prepared and filed in accordance with the specificrules from the *Comissão de ValoresMobiliários* (the Brazilian Securities Commission, or “CVM”) andANEEL.

 

(b)         Constantcurrency remeasurement — Up to December 31, 1997, Brazil was considered ahighly inflationary economy (cumulative inflation exceeding a total of 100%over a consecutive 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.

 

Underthe constant currency method, all relevant non-monetary assets and liabilities,shareholders’ equity accounts and components of the statements of operations,cash flows and changes in shareholders’ equity were expressed in the constantpurchasing power of the currency as of the most recent balance sheet date.

 

Beginningon January 1, 1998, Brazil ceased to be considered a highly inflationaryeconomy under U.S. GAAP and, accordingly, the Company ceased to restate its financialstatements in constant *reais* forthe effects of inflation as from that date. The restated balances ofnon-monetary assets and liabilities as of December 31, 1997 thusconstitute the historical amounts of such assets and liabilities as from thatdate.

 

F-10

----

 

Shareholders’equity presented in these financial statements differs from that included inthe statutory accounting records filed pursuant to the accounting practicesadopted in Brazil as a result of the following: (i) as of January 1,1996, indexation of Brazilian financial statements prepared for BrazilianCorporate Law purposes was abolished, whereas for U.S. GAAP purposes suchindexation was applied up to December 31, 1997; (ii) differences betweenthe IGP-DI and the official indices mandated for indexation of the financialstatements prepared in accordance with the accounting practices adopted inBrazil; and (iii) adjustments made to reflect the requirements of U.S.GAAP. Current income taxes and dividend distribution capacity are determinedbased on the financial statements prepared in accordance with accountingpractices adopted in Brazil.

 

(c)          Principlesof consolidation — The consolidated financial statements include the accountsof all majority-owned subsidiaries as of December 31, 2004, and GASMIG’srevenues and expenses for the period from January 1, 2004 to December 15,2004, the date of acquisition of a 40% equity interest in GASMIG by Petrobras.As discussed in note 10, in December 2004, the Company entered into ashareholders’ agreement giving the minority shareholder in GASMIG substantiveparticipating rights. These rights preclude the Company from consolidatingGASMIG. Consequently, the Company’s investment in GASMIG is accounted for usingthe equity method of accounting as of the date of the shareholders’ agreement.

 

Inconsolidation, all significant intercompany balances and transactions wereeliminated. The minority interest in the positive equity in subsidiaries isshown separately as a liability.

 

(d)         Foreigncurrencies — Assets and liabilities denominated in foreign currencies arerelated principally to financing and are translated into *reais* at the official exchange ratesreported by the Brazilian Central Bank at each balance sheet date. Theresulting gains and losses are recognized currently and included in thestatements of operations for the appropriate period.

 

(e)          Cashand cash equivalents — The Company considers unrestricted cash on hand,deposits in banks and short-term investments with original maturities of threemonths or less, when purchased, and readily convertible to cash to be cash andcash equivalents.

 

(f)            Restrictedinvestments — Restricted investments consist of investments with originalmaturities of three months or less, which are legally restricted for capitalexpenditures and repayment of foreign currency debt based on the related debtagreements and the requirements of the Brazilian Central Bank.

 

(g)         Accountsreceivable — Includes both amounts billed to customers and accrued revenuesrelating to unbilled energy supplied to customers as of the balance sheet date.Late fees arising from overdue electricity bills are accounted for on a cashbasis. The allowance for doubtful accounts is recorded at an amount estimatedby management as sufficient to cover probable losses.

 

(h)         Investments— The Company’s investments in affiliated companies in which the company hasthe ability to exercise significant influence, but not control, are accountedfor using the equity method of accounting.

 

(i)             Property,plant and equipment — Are recorded at acquisition or construction cost,restated to reflect price-level changes through December 31, 1997. Interest and other financing charges, excluding foreignexchange losses, incurred during the construction period on third-partyfinancing are capitalized, in accordance with SFAS 34. Depreciation is computedon the straight-line method, at annual rates determined by ANEEL, whichrepresent the estimated useful lives of the assets. Expenditures formaintenance and repairs are charged to operating costs as incurred. Materialsto be used in construction are included in electric generation, distributionand transmission assets. The net results of disposals of fixed assets arerecorded as part of operating income.

 

TheCompany’s investments in consortia (groups of organizations participating injoint ventures formed to promote common objectives or engage in projects tobenefit all the members without the creation of a legal entity), are recorded atacquisition or construction cost less allowance for loss, when applicable. Interest and other financing charges, excluding foreignexchange losses, incurred during the construction period on third-partyfinancing are capitalized, in accordance with Statement of Financial AccountingStandards (“SFAS”) 34 “Capitalization of Interest Cost”. The consortium

 

F-11

----

 

depreciationis computed on the straight-line method, at annual rates determined by ANEEL,which represent the estimated useful lives of the consortia’s underlyingassets. The consortium expenditures for maintenance and repairs are chargedproportionally to operating costs by the Company as incurred.

 

(j)             Impairmentof long-lived assets — CEMIG follows SFAS 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets”. Whenever events or changes in circumstancesindicate that the carrying value of long-lived assets may not be recoverable,CEMIG performs calculations of undiscounted cash flows expected to be derivedfrom assets in service to determine whether impairment has occurred. In theevent such cash flows are not expected to be sufficient to recover the recordedvalue of the assets, such assets are written down to their estimated fairvalues based on discounted cash flow analyses. The Company has not recognizedany impairment as a result of the application of this accounting policy for allperiods presented.

 

(k)          Revenues,costs and expenses — Revenues, costs and expenses are recognized on an accrualbasis, i.e., when persuasive evidence of an arrangement exists, delivery ofgoods has occurred or services have been rendered, our rates have been fixed orare determinable, and collectibility is reasonably assured regardless of whencash is received.

 

Revenuesfrom the sale of electricity generation are recorded based upon the outputdelivered provided at rates as specified under contract terms or prevailingregulatory rates. Electricity distribution sales to final customers arerecognized when power is provided. Billings for these sales are made on amonthly basis. Unbilled revenues from the billing cycle up to the end of eachmonth are estimated based on the prior month’s billing and are accrued at theend of the month. Differences between estimated and actual unbilled revenues,which have not been significant, are recognized in the following month.

 

Electricitysales to the interconnected power system are recorded when earned and billedmonthly.

 

Revenuesreceived by the Company from other concessionaires using its basic transmissionnetwork are recognized in the month that the network services are provided tothe other concessionaires.

 

Revenuesfrom natural gas sales by GASMIG are recognized when the natural gas issupplied.

 

Servicesrendered include connection fees and other related services and the revenuesare recognized when the services are provided.

 

Taxeson revenue consist of: (i) value-added tax (“VAT”), which is a state taxdue on the sales to final customers, is billed to the consumers and recorded aspart of gross revenue; (ii) COFINS revenue tax; (iii) PIS-PASEPsocial contribution tax on revenues; and (iv) Emergency capacity charge.It is the Company’s policy to deduct these taxes from gross revenues.

 

(l)             Incometaxes — CEMIG accounts for income taxes in accordance with SFAS 109 “Accountingfor Income Taxes”, which requires an asset and liability approach to recordingdeferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective income tax bases.

 

CEMIGrecords the tax benefit of all net operating losses as a deferred tax asset andrecords a valuation allowance, when necessary, to reflect the benefit thatmanagement believes will more likely than not be recovered through futuretaxable income.

 

(m)       Contingencies— The Company records provisions for contingencies when the loss is consideredto be probable based on the opinion of internal and external legal counsel andis reasonably estimable, in accordance with SFAS 5 “Accounting forContingencies”.

 

(n)         Employees’benefit plans — The Company sponsors a defined-benefit pension plan and adefined-contribution plan covering substantially all of its employees. TheCompany has also established post-retirement health care plans and pays lifeinsurance premiums for its retirees. The Company applies SFAS No. 87, “Employers’Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting forPost-retirement Benefits Other Than Pensions” which require recognition of thecosts on a

 

F-12

----

 

comprehensiveaccrual basis. The Company has disclosed information about pension plans andother postretirement benefit plans as required by SFAS 132(R) “Employers’ Disclosures about Pensions andOther Postretirement Benefits.”

 

UnderBrazilian law, employees are entitled to a minimum of one-month vacation uponcompletion of each year of service. CEMIG fully accrues this liability based onthe vested entitlement of the employees at each period end, plus related socialsecurity costs.

 

(o)         Environmentaland remediation costs — CEMIG, in accordance with its environmental policy, hasestablished various damage control and prevention programs in order to helplimit its risks with respect to major environmental-related liabilities. Thecost of these programs is expensed as incurred. CEMIG’s policy is to providefor remediation costs when the responsibility to remediate is probable and theamount of associated costs is reasonably determinable. No provision in respectof these matters has been required to date.

 

(p)         Comprehensiveincome (loss) — CEMIG reports comprehensive income (loss) in accordance withSFAS 130 “Reporting Comprehensive Income” and has elected to present this inthe statement of operations. Comprehensive income (loss) comprises the resultsof unrealized holding gains or losses on securities classified asavailable-for-sale under SFAS 115 “Accounting for Certain Investments in Debtand Equity Securities” and minimum pension liability adjustments made pursuantto SFAS 87. All investments in securities classified as available-for-sale weresold in 2003.

 

(q)         Regulationand deferred regulatory assets — As a result of various actions taken by theFederal Government and ANEEL in 2001, the Company is subject to the provisionsof SFAS 71 “Accounting for the Effects of Certain Types of Regulation”. Therate-setting structure in Brazil is now designed to provide for recovery of theCompany’s allowable costs, including those incurred as a result of FederalGovernment-mandated power rationing measures imposed in 2001, as describedfurther below. Accordingly, the Company capitalizes incurred allowable costs asdeferred regulatory assets when instructed by ANEEL and there is a probableexpectation that future revenue equal to the costs incurred will be billed andcollected as a direct result of the inclusion of the costs in an increased rateset by the regulator. The deferred regulatory asset is eliminated when theCompany collects the related costs through billings to customers at theincreased rate. ANEEL performs a rate review on an annual basis. If ANEELexcludes all or part of a cost from recovery, that portion of the deferredregulatory asset is impaired and is accordingly reduced to the extent of theexcluded cost. The Company has recorded net deferred regulatory assets that itexpects to pass through to its customers in accordance with and subject toregulatory provisions.

 

During 2001, the Federal Government instituted an electricity rationingplan in response to an energy shortage caused by low rainfall, reducedreservoir levels and Brazil’s significant dependence on electricity generatedfrom hydrological resources. The rationing resulted in losses for the Companyand other electricity distribution companies in Brazil. In December 2001,electricity concessionaires including the Company reached an industry-wideagreement (the General Agreement of the Electricity Sector or the “General Agreement”)with the Federal Government that provided resolution to rationing-relatedissues as well as to certain other electricity rate-related issues. The GeneralAgreement provided for a rate increase intended to reimburse revenues lost as aresult of the rationing program in 2001 and 2002. The increased rates will bein force in the electricity industry for an average period of 72 months as fromJanuary 2002. The asset of R$404 (note 4) recognized by the Companyrepresents the amount expected to be recovered over the next 24 months, inaccordance with Emerging Issues Task Force (“EITF”) No. 92-7 “Accountingby Rate Regulated Utilities for the Effects of Certain Alternative RevenuePrograms”. The balances of the deferred regulatory assets are periodicallycompared with the Company’s recoverability projections, which are reviewed byManagement depending on market events, changes in regulation and relatedcircumstances. The respective provision for losses is adjusted accordingly.

 

The General Agreement also addressed Parcel A costs, which are certaincosts that each distribution company is permitted to defer and pass through toits customers via a future rate adjustment. Parcel A costs are limited by theconcession contracts to the cost of purchased power and certain other costs andtaxes not controlled by the Company. ANEEL had granted rate increases torecover a portion of previously deferred Parcel A costs. The General Agreementprovided a tracking account mechanism, created in October 2001 throughExecutive Order No. 296, to record

 

F-13

----

 

the variation in the Parcel A costs for rate adjustment calculationpurposes. Parcel A costs incurred previous to January 1, 2001 are notrecoverable though 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.

 

(r)            Earningsper share — Since each class of shares participates equally in earnings in theyears presented, earnings per share was computed by dividing net income by theweighted average number of common and preferred shares outstanding during theyear. Consistent with many other Brazilian corporations, CEMIG disclosesearnings per one thousand shares, as this is the minimum number that can betraded on the Bolsa de Valores de São Paulo (the São Paulo Stock Exchange, or “BOVESPA”).As mentioned in note 3, the Company has a contingent obligation to issue sharesof capital stock in connection with payments received on the account receivablefrom the State Government. This accounts receivable is currently being paiddown with dividends due to the State Government. Any shares to be issued inconnection with this obligation are considered for purposes of calculatingdilutive earnings only when all necessary conditions for their issuance havebeen satisfied. As such, these shares are considered dilutive as defined inSFAS 128 “Earnings per Share”. However, the potentially dilutive shares in2002, consisting solely of the estimate of shares issuable mentioned above,have been excluded from the computation for 2002 as their effect would havebeen anti-dilutive, as a result of the net loss incurred in that year.  In 2004 and 2003, the Company has noobligation to issue shares in connection with dividends used to offset thereceivable, as the corresponding shares (129,145 shares) were already issued in2002. As a result of this, basic and diluted earnings per share are the samefor all periods presented.

 

(s)          Segmentinformation — The Company operates in the electric energy, gas distribution andtelecommunication segments. The respective breakdown of information is includedin note 29. The Company’s electric energy business is managed centrally on thebasis of the consolidated results of the generation, transmission anddistribution operations until December 31, 2004. Accordingly, the electricenergy business represents a single segment per the criteria described in SFAS131- “Disclosures about Segments of an Enterprise and Related Information”.As described in note 29, the Company restructured its operations on January 1,2005 to separate its generation and transmission and distribution activities.

 

(t)            Derivativesand hedging activities — As required by SFAS 133 - Accounting for DerivativeInstruments and Hedging Activities” derivative financial instruments are beingrecorded based on their fair values as assets or liabilities in theaccompanying balance sheet, and corresponding changes in fair value are beingrecognized in earnings.  Hedge accountinghas not been applied to any of the Company’s derivative financialinstruments.  The Company calculates thefair value of financial instruments using quoted market prices wheneveravailable. When quoted market prices are not available, the Company usesstandard pricing models with market-based inputs, which take into account thepresent value of estimated future cash flows.

 

**3. ACCOUNT RECEIVABLE FROM MINAS GERAIS STATE GOVERNMENT**

 

Prior to March 1993, the following twoprinciples guided the rate setting process in Brazil: (i) that electricutilities should be guaranteed an annual real rate of return on service-relatedassets included in the rate basis; and (ii) that the rates charged to eachclass of customer for electric power should be uniform throughout Brazil,notwithstanding the high cost of distributing electricity to remote areas ofthe country.

 

Under this rate structure, the guaranteed return wasset by the Brazilian Federal Government through its regulatory agency at alevel between 10% and 12%, depending on the particular circumstances of eachconcessionaire. In order to compensate concessionaire companies experiencing arate of return below the national average of the sector, the Federal Governmentcreated the National Reserve for Compensation of Remuneration - RENCOR, throughwhich profits from more profitable companies were to be reallocated to lessprofitable companies, so that the rate of return realized by all companieswould be equal to the national average of the sector.

 

F-14

----

 

The shortfall experienced by most concessionairecompanies between the guaranteed return and the actual realized rate of returnwas accounted for by an increase in each company’s Recoverable Rate DeficitAccount (the “CRC Account”), in an amount equal to such shortfall. This accountwas recorded, until 1992, in a memorandum account, not as an asset on thebalance sheet.

 

With the enactment of Law No. 8,631 on March 4,1993, the Company recorded a receivable, crediting the statement of operations,from the Federal Government for the balance of the rate shortfall compensationas approved by the regulatory agency. During 1993 and 1994, the Companyrecovered part of the rate shortfall through an offset against amounts due toFederal Government-owned entities arising from purchased power and financing.

 

On May 2, 1995, the obligation to pay theremaining balance of this receivable, then R$602, was transferred from theFederal Government to the State Government through a credit assignmentcontract. In connection with this assignment, the State Government agreed topay the amount due to the Company over 20 years, with an initial three-yeargrace period, as restated based on the UFIR (Tax Reference Unit Index) andaccruing interest at 6% per year.

 

In the event that the Company receives any paymentsor retains declared dividends to offset amounts not paid by the StateGovernment, the Company is obligated to issue shares to all shareholders inproportion to their shareholdings, transferring the principal amount of therelated paid installments from Appropriated retained earnings - Rate shortfallreserve to Capital Stock.

 

Since the original contract, there have been thefollowing amendments:

 

(a) First Amendment to the CRC CreditAssignment Contract, signed on January 24, 2001

 

The purpose of this amendment was to change themonetary restatement index from UFIR to IGP-DI (Índice Geral de Preços – “GeneralMarket Price Index”), since the UFIR was extinguished in October 2000.

 

(b) Second Amendment to the CRC CreditAssignment Contract, signed on October 14, 2002

 

This Amendment refers to 149 installments from theoriginal contract, maturing from January 1, 2003 to May 1, 2015, inthe total amount of R$1,844, as of December 31, 2004. These installmentsare subject to annual interest of 6% and are restated based on the IGP-DI.

 

Due to the non-inclusion in the Second Amendment ofeffective guarantees that would assure the realization of the aforementionedcredit, CEMIG recorded an allowance for losses equal to the total amountreferred to in the Second Amendment.

 

Due to the full allowance recorded on April 1,2002, the financial income related to monetary restatement and interest on theSecond Amendment, from April 2002 to December 2004 in the amount ofR$800, did not impact results, considering that provisions for loss wererecorded in the same amounts. However, in compliance with Brazilian taxlegislation, CEMIG recorded the federal taxes payable on the financial income,since the recorded allowances are considered permanently non-deductible for taxpurposes in accordance with Brazilian tax legislation.

 

Installments under this Amendment, due from January 1,2003 to May 1, 2005, totaling R$552, including monetary restatement,interest and fines were not collected by the Company. Company management isnegotiating the collection of the aforementioned past due amount with the StateGovernment, under the conditions established by the contract.

 

(c) Third Amendment to the CRC CreditAssignment Contract, signed on October 24, 2002

 

CEMIG and the State Government signed the ThirdAmendment in order to reschedule the payment of the original contractinstallments due from April 1, 1999 to December 1, 1999 and from March 1,2000 to December 1, 2002. These installments were renegotiated with anannual interest rate of 12.00% per year and monetary restatement based on theIGP-DI. The installments are due in 149 monthly payments from January 2003to May 2015. This amendment amounts to R$1,097 as of December 31,2004, including interest and fines on overdue installments.

 

F-15

----

 

The Third Amendment also established a guaranteewhich permits the Company to retain dividends (including interest on capital inlieu of dividends) to be paid to the State Government, as a Companyshareholder, net of amounts intended to acquire Company debentures related tothe Irapé power plant construction. This guarantee will continue in force evenafter the Third Amendment termination date, scheduled for May 2015.

 

Part of the Third Amendment installment duefrom June 1, 2003 to May 1, 2005, totaling R$348, including monetaryrestatement, interest and fines, were not collected by the Company. The Company’smanagement is negotiating the collection of the aforementioned past due amountwith the State Government, under the conditions established by the contract.

 

CEMIG paid interest on capital in lieu of dividendsin December 2004, of which R$72 was due to the State Government. Part ofthis interest on capital, amounting to R$49, was used by the State Governmentto settle part of the CRC overdue credits and the remainder, in the amount ofR$23, to acquire debentures issued by CEMIG for the Irapé power plantconstruction.

 

The projection of the Company’s future operationsindicates that the dividends attributable to the State Government will besufficient, in the long-term, to assure the full realization of the creditrelated to the Third Amendment, in the event of nonpayment by the debtor.

 

Management monitors future events which may impactthe Company’s dividend payment projections, in order to conclude whether theabove-mentioned guarantee is still effective or an additional allowance underthis amendment is necessary.

 

(d) The composition of the CRC balance as of December 31,2004 and 2003 is follows:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Second amendment:                       |       |                  |       |   |   |
| Current -                               |       | 1,409                 |       | 1,293 |   |
| Past due amounts as of December 31 |       | 435                   |       | 226 |   |
| (-) Allowance for losses                |       | (1,844                | )          | (1,519 | ) |
| Net amount recorded                     |       | —                |       | — |   |
|                                    |       |                  |       |   |   |
| Third amendment:                        |       |                  |       |   |   |
| Current                                 |       | 836                   |       | 744 |   |
| Past due amounts as of December 31 |       | 261                   |       | 147 |   |
| Net amount recorded                     |       | 1,097                 |       | 891 |   |

 

The Company has recorded, under current liabilities,dividends and interest on capital, proposed by management and the Board ofDirectors, to be paid to shareholders related to 2004 net income after theapproval by the Shareholders’ Meeting, of which R$147 is due to the StateGovernment. Part of such dividends, in the amount of R$23, are destined tothe acquisition of Irapé Plant debentures, by the State of Minas Gerais andR$124 may be used to settle part of the CRC overdue credits.

 

e) Negotiations with the State Government

 

The State Government is preparing a new proposal tosettle the payments of the CRC contract. This new proposal includes a newamendment to the contract, with a rescheduling of the contract payment and anew dividend policy for the Company, which will allow the settlement of thecontract through the retention of dividends due to the State Government.

 

F-16

----

 

**4. DEFERRED REGULATORY ASSETS**

 

The components of the deferred regulatory assets areas follows:

 
| ** **                                                                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Energy Rationing Plan:                                                                                    |       |                  |       |   |   |
| Revenue losses (expected to be recovered within the  next 24 months) incurred during the rationing period |       | 404                   |       | 446 |   |
| Recording of energy transactions on the CCEE/MAE                                                          |       | 1,002                 |       | 1,030 |   |
| (-) Provision for loss on deferred regulatory assets                                                      |       | (13                   | )          | (4 | ) |
|                                                                                                      |       | 1,393                 |       | 1,472 |   |
| Additional Parcel A costs:                                                                                |       |                  |       |   |   |
| - Period from January 1, 2001 to October 25,  2001                                              |       | 462                   |       | 398 |   |
| - Period from October 26, 2001 and thereafter                                                        |       | 549                   |       | 621 |   |
|                                                                                                      |       |                  |       |   |   |
| Deferred rate adjustment                                                                                  |       | 1,013                 |       | 211 |   |
| PIS/PASEP/COFINS                                                                                          |       | 348                   |       | — |   |
|                                                                                                      |       | 3,765                 |       | 2,702 |   |
|                                                                                                      |       |                  |       |   |   |
| Current assets                                                                                            |       | 836                   |       | 633 |   |
| Other assets                                                                                              |       | 2,929                 |       | 2,069 |   |

 

During the years ended December 31,2004, 2003, and 2002, theCompany collected R$310, R$271, and R$218, respectively, as a result ofapplication of the extraordinary rate adjustment.

 

The VATrelated to the rationing program revenue, deferred rate adjustment and regulatoryassets – PIS/COFINS, amounting to R$537 as of December 31, 2004 (R$370 asof December 31, 2003), only becomes an obligation to be recorded in thefinancial statements once the customers are billed. However, because theCompany’s only responsibility is to transfer this tax from its consumers to theState tax authorities, the Company did not record this obligation in advance.The Company passes all VAT amounts received from customers on to the StateGovernment. In 2004, as a result of the application and billing of theextraordinary rate adjustment, the Company collected VAT of approximately R$65,which it passed on to the State Government. Such amount is recorded as grossoperating revenues and sales deduction not affecting net operating revenues.

 

a) Energy Rationing Plan

 

Anemergency energy-rationing program (the “Energy Rationing Plan”) was created bythe Federal Government’s Executive Order No. 2148, of May 22, 2001,to reduce energy consumption and avoid unplanned interruption in power supply.Average reduction in monthly consumption of electricity during the rationingperiod was estimated at 20% of the actual consumption for the months of May, June andJuly 2000. The energy rationing became effective on June 1, 2001 andended February 28, 2002, when the Federal Government determined that thewater levels in the reservoirs serving Brazil’s hydroelectric facilities hadreturned to normal.

 

As aresult of the Energy Rationing Plan, many electric generation and distributioncompanies in Brazil, including CEMIG, experienced a reduction in their profitmargins, as their physical and personnel structures could not be reduced inline with the consumption reduction quotas imposed. Thus, they continuedincurring fixed costs without earning corresponding revenue.

 

In December 2001,the Federal Government and the electric utilities in Brazil affected by theEnergy Rationing Plan signed the General Agreement referred in note 29 toregain the financial-economic equilibrium of the existing concession contractsand recover revenues relating to the period during which the Energy Rationing Plan was in effect.

 

TheGeneral Agreement addressed margin losses incurred by the electric distributionand generation companies during the period that the Energy Rationing Plan waseffective and costs of energy purchased in the spot market through the *Mercado Atacadista de Energia* (theWholesale Energy Market or “MAE”),

 

F-17

----

 

succeededby the *Câmara de Comercialização de EnergiaElétrica* – CCEE (“CCEE/MAE”), up to December 2002. These itemswill be recovered by an extraordinary rate adjustment as follows:

 

I.                 an increase of 2.90% for rural and residential consumers(excluding low-income consumers), lighting streets and high-tension industrialconsumers whose costs related to electric energy represent at least 18.00% ofaverage production cost and fulfill certain criteria, related to charge**and demand energy factors which were determined by ANEEL’s Resolution No. 130, dated April 30,2002; and

 

II.             anincrease of 7.90% for all other consumers.

 

Theextraordinary rate adjustment regulatory asset had its maximum recovery period,initially established as being 82 months, reduced to 74 months, from January 2002to February 2008, pursuant to ANEEL’s Resolution No. 1 dated January 12,2004. The Company has made studies to verify if the 74-month recoveryperiod would be sufficient to recover the amounts approved by ANEEL. Based onthose studies, the Company recorded an allowance for losses in the amount forR$13 and R$4 as of December 31, 2004 and 2003, respectively.

 

Consideringthat the assumptions used in management’s studies may change throughout therecovery period, management periodically reviews these projections, andconsequently, the recorded allowance.

 

(a.1)Recovery of revenue losses incurred during the period of the Energy RationingPlan:

 

AlthoughCEMIG’s total revenue losses were R$692 as of December 31, 2004 (R$781 asof December 31, 2003), CEMIG recorded a regulatory asset on a U.S. GAAPbasis in the amount of R$404 as of December 31, 2004 (R$446 as of December 31,2003), in accordance with consensus reached by the FASB’s  — EITF Issue No. 92-07, “Accountingby Rate-Regulated Utilities for the Effects of Certain Alternative RevenuePrograms”, which establishes a 24-month period limit for collection ofthe asset.

 

Theaccrued amount related to this asset, which will be reimbursed through thespecial rate adjustment is monetarily restated based on SELIC from January 1,2002 until collection.

 

(a.2) Energy transactions onthe CCEE/MAE and other:

 

Duringthe period of the Energy Rationing Plan in Brazil, electricity utilities,including CEMIG, made a substantial number of energy purchases on the spotmarket through the CCEE/MAE in order to supply their customers. During thisperiod, the prices for spot market energy were often significantly higher thanthe prices set forth in initial energy purchase contracts.

 

Costsrelated to energy sold on the CCEE/MAE are being prorated among consumerssupplied by the Brazilian interconnected power system through an extraordinaryrate adjustment, beginning in January 2002. The amount to be passed alongto consumers through the rate adjustment is calculated based on the amount ofenergy purchased on the CCEE/MAE during the period from June 1, 2001 untilFebruary 28, 2002, and equals the difference between the energy purchaseprice on the CCEE/MAE and R$49.26/MWh (which is the initial contract averagecost for the period). Generators will not be reimbursed with respect toCCEE/MAE energy purchases at a price less than or equal to R$49.26/MWh.

 

Under ANEEL Resolution No. 36, dated January 29,2003, beginning in March 2003, the Company is required to collect from itscustomers and transfer to generators, on a monthly basis, the special rateadjustment amounts. Pursuant to this resolution, the Company is also entitledto receive R$200 from other distributors relating to its generation activitiesby December 2004. As of December 31, 2004, only R$52 of this amountwas received by the Company, since certain distribution concessionaires believethat the Company is challenging the General Agreement of the Electricity Sectorsince it has filed a claim against CCEE/MAE relating to the methodology used tocalculate CEMIG’s obligations resulting from the CCEE/MAE transactions.

 

A portion equaling 82% of CEMIG’s receivablesrelating to CCEE/MAE transactions is being monetarily restated based on theSELIC. The remaining 18% has not been monetarily restated and corresponds,according to CEMIG estimates, to the amounts that were not settled on theCCEE/MAE due to judicial claims currently in progress, filed by generators anddistributors. According to ANEEL Resolution No. 36,

 

F-18

----

 

these amounts can only be monetarily restated afterthe definitive CCEE/MAE settlement, which will only take place after theresolution of the judicial claims.

 

In December 2002,the Company filed a claim against ANEEL and CCEE/MAE contesting the amountsthat were charged to the Company during the settlement process carried out byCCEE/MAE. The Company believes that the recorded payable to CCEE/MAE of R$143was not correctly calculated. ANEEL contested this claim and issued a rulingsuspending the payment of the remaining RTE credits of R$148 to CEMIG. In January 2003,the Company filed a lawsuit to cancel the ANEEL’s ruling regarding thesuspension of the RTE payments and the Federal Court ruled in the Company’sfavor and suspended the effects of ANEEL’s ruling. On December 2004, theCompany withdrew the above claim and entered into an agreement with ANEEL andthe other market participants; the withdrawal of the lawsuit is still subjectto the court’s approval. The Company had previously recorded a provision ofR$143 related to this matter and consequently the withdrawal of this claim hadno impact on the Company’s financial statements for the year ended December 31,2004.

 

The major terms of the above agreement, which isstill subject to approval by the CCEE agents and ANEEL, are as follows:

 

•                  CCEE/MAE will recalculate CEMIG’s liability;

•                  The calculated amounts will be updated byIGP-M from July 2003 until the beginning of the settlement, on a date tobe determined by CCEE/MAE;

•                  CEMIG will settle the liability over amaximum term of 50 months; the liability will be subject to monetaryrestatement based on the SELIC variation, beginning on the official settlementdate, plus 1.00%  interest per year.

•                  ANEEL will eliminate the rulingsuspending the payment of the remaining RTE credits; these amounts will be paidto CEMIG over a period of two months.

 

(a.3)Recovery of additional Parcel A costs:

 

(a.3.1)Additional Parcel A Costs from January 1, 2001 to October 25, 2001

 

ANEELResolution No. 90, dated February 18, 2002, established proceduresfor the recovery of certain Parcel A costs incurred during the period from January 1,2001 to October 25, 2001. The base amount to be reimbursed is equal to thedifference between the Parcel A costs actually incurred and the estimatedParcel A costs used for purposes of computing the last annual rate adjustmentprior to the Energy Rationing Plan. This amount bears interest at the SELICrate from the day that the actual cost was paid until the date of recovery. ANEEL,through Normative Resolution No.1 dated January 12, 2004, declared thatthe variations 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 energywill also be used to recover the Parcel A costs.

 

(a.3.2)Additional Parcel A Costs from October 26, 2001 and thereafter

 

On October 25,2001, the Federal Government, through Executive Act No. 296, created atracking account mechanism to control the variation of Parcel A costs for rateadjustment calculation purposes. Thisaccount is comprised of the amounts resulting from the difference between theParcel A costs actually incurred, from October 26, 2001 and thereafter,and the estimated Parcel A costs used for purposes of computing the annual rateadjustment as from April 8, 2001.

 

TheFederal Government, through Executive Act No. 116, issued on April 4,2003, deferred for 12 months the recovery of Parcel A costs incurred from March 10,2002 to March 9, 2003. Such Parcel A costs were included in the electricenergy rate for 24 months, effective April 8, 2004. Therefore, the ParcelA costs balances, recorded as Deferred regulatory assets as of December 31,2004, were classified as current and other assets considering the respectiveexpected realization period.

 

F-19

----

 

Theamounts determined for the Parcel A costs for the period from October 26,2001 and thereafter are recorded as deferred regulatory assets, as follows:

 
| **Parcel A Items**                           | ** ** | **Total  December  31,  2004** | ** ** | **Total  December  31,  2003** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                         |       |                           |       |                           |       |
| System service charges                       |       | 143                            |       | 206                            |       |
| Itaipu Binacional electricity purchase rate  |       | 178                            |       | 257                            |       |
| Itaipu Binacional electricity transport rate |       | 12                             |       | 11                             |       |
| Fuel usage quota – CCC                  |       | (31                            | )          | (132                           | )          |
| Rate for use of basic transmission network   |       | 170                            |       | 170                            |       |
| Energy development account quota – CDE  |       | 33                             |       | 48                             |       |
| Charges for use of water resources           |       | 44                             |       | 61                             |       |
|                                         |       | 549                            |       | 621                            |       |

 

Theabove-mentioned amounts are restated based on the SELIC from the expensepayment date to effective recovery through annual rate adjustments.

 

Therecoverable amounts recorded in current assets refer to variations ofuncontrollable costs that are being offset based on the annual rate adjustmenton April 8, 2005, according to management’s estimates.

 

b) Deferred rate adjustment

 

TheANEEL Resolution No. 71, dated April 4, 2005, disclosed the definitiveresults of CEMIG’s periodic rate review. According to this resolution, the rateadjustment that should have been applied to CEMIG’s rates on April 8, 2003was 44.41%, instead of the rate of 31.53% that was originally applied. Thedifference will be included by ANEEL in the future rate adjustments.Consequently, CEMIG recorded a deferred regulatory asset for the differencebetween 44.41% and 31.53% rate increase on the volume of electricity sold tocustomers from April 8, 2003 to December 31, 2004, in the amount ofR$1,013, including monetary restatement. This amount will be collected throughannual rate increases from April 8, 2004 to April 8, 2007.

 

In2003, the Company recorded a deferred regulatory asset in the amount of R$211,which corresponds to the difference between 37.86% (the rate adjustmentprovisionally disclosed by ANEEL in the prior period) and the 31.53% rateincrease on the volume of electricity sold to customers from April 8, 2003to December 31, 2003.

 

c) PIS-PASEP/COFINS

 

The Federal Laws No. 10,637and 10,833 increased the rates and changed the basis of calculation ofPIS/PASEP and COFINS taxes on revenues. As a result of those changes, there wasan increase in expense relating to PIS/PASEP and COFINS, from December 2002to December 2004 and from February of 2004 to December of 2004,respectively. ANEEL, through correspondence sent to CEMIG, recognized theCompany’s right to record an asset related to the additional costs relating toPIS/PASEP and COFINS. These amounts are recorded as a noncurrent asset in theCompany’s financial statements.

 

The recorded amountsshall be recovered in future rate adjustments, beginning in April 2005,and the monetary restatement criteria and the recovery term are still pendingdefinition by ANEEL. However, CEMIG recorded the amounts updated by the IGP-Mvariation.

 

F-20

----

 
| ** **                                                                        | ** ** | **December, 31  2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                              |       |                   |       |
| PIS/PASEP – expenses increase from December 2002  to December 2004 |       | 101                    |       |
| COFINS expenses increase from February 2004 to December 2004            |       | 228                    |       |
| Monetary restatement – IGP-M                                                 |       | 19                     |       |
|                                                                              |       | 348                    |       |

 

**5. DEFERRED INCOME TAXES**

 

Income taxes in Brazilinclude federal income tax and social contribution on income (which is anadditional federal income tax). For U.S. GAAP purposes, the statutory annualrates applicable are 25% for federal income tax and 9% for social contributiontax.

 

(a) Income tax reconciliation:

 

Theamounts reported as income tax expense in the financial statements arereconciled to the statutory rates as follows:

 
| ** **                                                                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                               |       |                             |       |   |   |   |   |
| Income before income taxes and minority interests                                                  |       | 2,468                            |       | 2,003 |   | 2 |   |
| Income taxes – 34% rate                                                                       |       | (839                             | )          | (681 | ) | (1 | ) |
| Effects of:                                                                                        |       |                             |       |   |   |   |   |
| Tax benefit (expense)-                                                                             |       |                             |       |   |   |   |   |
| Interest on capital                                                                                |       | 173                              |       | 85 |   | 73 |   |
| Interest and monetary variation on provision for  loss on account receivable from State Government |       | (111                             | )          | (67 | ) | (91 | ) |
| Amortization of special liabilities                                                                |       | 35                               |       | 31 |   | 32 |   |
| Others                                                                                             |       | 11                               |       | 25 |   | (39 | ) |
| Tax expense in the statement of operations                                                         |       | (731                             | )          | (607 | ) | (26 | ) |

 

As from January 1,1996, Brazilian companies are permitted to pay interest on capital. Thecalculation is based on the shareholders’ equity amounts prepared in accordancewith accounting principles adopted in Brazil. The interest rate applied may notexceed the long-term interest rate determined by the Brazilian Central Bank andinterest paid may not exceed the greater of 50% of net income for the year or50% of retained earnings plus income reserves.

 

The amount of interest oncapital is deductible for income tax purposes. Accordingly, as opposed to apayment of dividends, the benefit to CEMIG is a reduction in its income taxespayable equivalent to the statutory tax rate applied to such amount. Income taxis withheld from the payment of such amount to shareholders’ at the rate of15%.

 

(b) Analysis of deferred tax balances:

 

Asof December 31, 2004 and 2003, the deferred tax balances have beencomputed using a 34% rate, which is the rate expected to be in force uponrealization. The major components of the deferred income taxes account in thebalance sheet are as follows:

 

F-21

----

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Current and other assets-                                                            |       |                  |       |   |   |
| Tax loss carryforwards                                                               |       | 16                    |       | 133 |   |
| Employee post-retirement benefits                                                    |       | 90                    |       | — |   |
| Provision for contingencies                                                          |       | 100                   |       | 77 |   |
| Other temporary differences                                                          |       | 108                   |       | 79 |   |
|                                                                                 |       | 314                   |       | 289 |   |
| Current assets                                                                       |       | 149                   |       | 114 |   |
| Other assets                                                                         |       | 165                   |       | 175 |   |
|                                                                                 |       |                  |       |   |   |
| Long-term liabilities-                                                               |       |                  |       |   |   |
| Employee post-retirement benefits                                                    |       | —                |       | (116 | ) |
| Temporary difference on regulatory assets                                            |       | (461                  | )          | (245 | ) |
| Effects of differences between book and tax basis of  property, plant and equipment. |       | (413                  | )          | (437 | ) |
|                                                                                 |       | (874                  | )          | (798 | ) |

 

Forthe years ended December 31, 2004 and 2003, deferred tax benefits of R$243and R$33 respectively, and for the year ended December 31, 2002, deferredtax expenses of R$119, related to the minimum pension liability adjustment andunrealized gains and losses on available-for-sale securities were recorded directlyto shareholders’ equity as other comprehensive income (loss).

 

**6. CASH AND CASH EQUIVALENTS**

 

The following table sets forth amounts of cash and cashequivalents for the dates indicated:

 
| ** **                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                                                              |       |                  |       |   |   |
| Cash on hand and in banks                                                                         |       | 48                    |       | 128 |   |
| Short-term investments, mainly bank certificates of  deposit and money market funds at fair value |       | 826                   |       | 312 |   |
|                                                                                              |       | 874                   |       | 440 |   |

 

CEMIGand its subsidiaries have investments in public and private securities issuedby third parties. These investments accrue interest rates based on theBrazilian Interbank Certificates of Deposit, or CDI, and can be redeemed at anytime without penalty or loss of income.

 

**7. RESTRICTED INVESTMENTS**

 

In compliance withResolution No. 2,515 dated June 29, 1998 issued by the BrazilianCentral Bank, when CEMIG extends the maturity of any foreigncurrency-denominated financing, it must make deposits in respect of theprincipal amount of such extended financing into a short-term investment escrowaccount so that at the final maturity date of the financing, such escrowaccount contains an amount equal to the entire principal amount due under thefinancing. The interest income is calculated based on the variation of CDI andthe U.S. dollar/*real* exchangerate and maturity dates that do not exceed 30 days. The restricted investmentsare classified as current and other assets according to the maturity date ofthe respective financing.

 

F-22

----

 

The following table sets forth amounts of restrictedinvestments for the dates indicated:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                 |       |                  |       |   |   |
| Interest based on variation of CDI   |       | 20                    |       | 91 |   |
| Interest based on U.S. dollar/*real* |       | —                |       | 41 |   |
|                                 |       | 20                    |       | 132 |   |
| Current assets                       |       | —                |       | 72 |   |
| Other assets                         |       | 20                    |       | 60 |   |

 

**8. ACCOUNTSRECEIVABLE, NET**

 

The following table sets forth information concerningaccounts receivable by type of consumers for the dates indicated:

 
| ** **                      | ** ** | ** **  | ** ** | **Past-due**       | ** ** | **Total**         | ** ** |
|---------------------------------|------------|-------------|------------|--------------------|------------|-------------------|------------|
| ** **                      | ** ** | **Current** | ** ** | **Up to 90  days** | ** ** | **Over 90  days** | ** ** | **December 31,** | ** ** |
| **2004**                        | ** ** | **2003**    |
|                            |       |        |       |               |       |              |       |   |   |   |   |
| Residential                     |       | 284         |       | 157                |       | 43                |       | 484 |   | 409 |   |
| Industrial                      |       | 218         |       | 44                 |       | 141               |       | 403 |   | 351 |   |
| Commercial                      |       | 120         |       | 66                 |       | 36                |       | 222 |   | 202 |   |
| Rural                           |       | 35          |       | 20                 |       | 9                 |       | 64 |   | 56 |   |
| Governmental entities           |       | 45          |       | 23                 |       | 23                |       | 91 |   | 121 |   |
| Public services                 |       | 123         |       | 26                 |       | 8                 |       | 157 |   | 103 |   |
| Subtotal                        |       | 825         |       | 336                |       | 260               |       | 1,421 |   | 1,242 |   |
| Distributors                    |       | 5           |       | —             |       | —            |       | 5 |   | 5 |   |
|                            |       | 830         |       | 336                |       | 260               |       | 1,426 |   | 1,247 |   |
|                            |       |        |       |               |       |              |       |   |   |   |   |
| Allowance for doubtful accounts |       | —      |       | —             |       | (165              | )          | (165 | ) | (106 | ) |
|                            |       | 830         |       | 336                |       | 95                |       | 1,261 |   | 1,141 |   |
| Current assets                  |       | 752         |       | 336                |       | 95                |       | 1,183 |   | 1,050 |   |
| Other non-current assets        |       | 78          |       | —             |       | —            |       | 78 |   | 91 |   |

 

Nosingle customer represented more than 10% of total receivables as of December 31,2004 and 2003 and electricity sales to final customers for the years ended December 31,2004, 2003 and 2002.

 

As December 31,2004, other non-current assets include accounts receivable from consumers, inthe amount of R$78, composed as follows:

 

•                  R$52 from Companhia de Saneamento deMinas Gerais - COPASA, a company controlled by the Minas Gerais StateGovernment. CEMIG renegotiated the payment of this receivable into 96 monthlyconsecutive installments, from October 2004 to September 2012. Thisreceivable is subject to IGP-M index variation and interest of 0.5% per month.

 

•                  R$26 from the Municipality of BeloHorizonte, due substantially to public lighting. The debt was renegotiated tobe paid in 80 monthly installments, until March 2010. This debt isrestated based on the Company’s rate adjustments.

 

F-23

----

 

Thechanges in allowance for doubtful accounts were as follows:

 
| ** **                       | ** ** | **Year ended December 31** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                             |       |                            |       |   |   |   |   |
| Balance at beginning of the year |       | 106                             |       | 58 |   | 54 |   |
| Accounts written off             |       | (3                              | )          | (9 | ) | (9 | ) |
| Provision for the year           |       | 62                              |       | 57 |   | 13 |   |
| Balance at end of the year       |       | 165                             |       | 106 |   | 58 |   |

 

**9.RECOVERABLE TAXES**

 

The following table sets forth amounts of taxesrecoverable for the dates indicated:

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                       |       |                  |       |   |   |
| Current assets -           |       |                  |       |   |   |
| Income tax                 |       | 75                    |       | 64 |   |
| Social contribution tax    |       | 3                     |       | 9 |   |
| VAT                        |       | 27                    |       | 26 |   |
| Other                      |       | 3                     |       | 9 |   |
|                       |       | 108                   |       | 108 |   |
| Other non-current assets - |       |                  |       |   |   |
| VAT                        |       | 141                   |       | 116 |   |
|                       |       | 141                   |       | 116 |   |

 

The recoverable VATcredits are being offset by the Company with VAT to be paid over a period of 48months, in accordance with Brazilian tax legislation. The Company is in a legaldispute with the State Government in order to offset the VAT credits arisingfrom acquired equipment to be used in the Company’s operation, in the amount ofR$20.

 

**10. INVESTMENTS**

 

Thefollowing table describes the consolidated investments:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                           |       |                  |       |   |   |
| Goodwill recorded on Rosal Energia acquisition |       | 33                    |       | — |   |
| Equity investments in Gasmig                   |       | 80                    |       | — |   |
| Other investments                              |       | 15                    |       | 12 |   |
|                                           |       | 128                   |       | 12 |   |

 

a) GASMIG - Sale of 40%of CEMIG’s interest in 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 part of theAssociation 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 capitalinvestments  will increase GASMIG’s dailynatural gas volume production from 3.5 million m3/day to 4.5 million m3/day atthe end of 2006, ultimately reaching 11.1 million m3/day in 2023.

 

F-24

----

 

GASMIG Shareholderagreement 

 

In 2004, the Companysigned a shareholders’ agreement with Petrobras relating to GASMIG which gavePetrobras substantive participating rights including, among others, (i) theapproval of operating budgets and (ii) approval of transactions notprovided for in the operating budget that exceed low threshold amounts. As aresult of these rights, the Company is precluded from consolidating GASMIG andconsequently, GASMIG is accounted for using the equity method of accounting beginningon the date of the shareholders’ agreement.

 

b) Investments in RosalEnergia S.A.

 

On December 23,2004, CEMIG acquired 100.00% of the capital stock of Rosal Energia S.A. (“Rosal”)for R$134. Rosal holds a concession to operate the Rosal hydroelectric plant,as well as the associated transmission system of the plant with installedcapacity of 55MW. The price of the acquisition was determined using theprojected cash flow of Rosal until 2032, the date that the concession expires.

 

CEMIG has recorded suchacquisition by assessing the fair value of Rosal Energia S.A. assets andliabilities and determining goodwill in accordance with the purchase methodprescribed by SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and OtherIntangible Assets”. The application of SFAS 141 and 142 resulted in therecognition of goodwill in the amount of R$33.

 

The net consolidatedassets of Rosal that were acquired are as follows:

 
| ** **                       | ** ** | **December, 31  2004** | ** ** |
|----------------------------------|------------|------------------------|------------|
| Current assets                   |       |                   |       |
| Property, plant and equipment    |       | 107                    |       |
| Other assets                     |       | 5                      |       |
| Total assets acquired            |       | 112                    |       |
| Current liabilities              |       | (1                     | )          |
| Other long-term liabilities      |       | (10                    | )          |
| Net consolidated assets          |       | 101                    |       |
| Interest acquired                |       | 100.00                 | %          |
| Net consolidated assets acquired |       | 101                    |       |
| Price paid                       |       | 134                    |       |
| Goodwill on purchase             |       | 33                     |       |

 

**11.PROPERTY, PLANT AND EQUIPMENT, NET**

 

The following table describes the consolidatedproperty, plant and equipment:

 
| ** **                     | ** ** | **Annual  average rate of** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **depreciation**            | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **%**                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service                     |       |                        |       |                  |       |   |   |
| Generation-                    |       |                        |       |                  |       |   |   |
| Hydroelectric                  |       | 2.48                        |       | 7,922                 |       | 7,787 |   |
| Hydroelectric – Consortia |       | 2.51                        |       | 470                   |       | 263 |   |
| Thermoelectric                 |       | 2.29                        |       | 260                   |       | 261 |   |
| Transmission                   |       | 3.38                        |       | 1,622                 |       | 1,512 |   |
| Distribution                   |       | 4.92                        |       | 7,571                 |       | 7,421 |   |
| Administration                 |       | 7.71                        |       | 441                   |       | 458 |   |
| Gas                            |       | 5.96                        |       | —                |       | 82 |   |
| Telecom                        |       | 7.94                        |       | 347                   |       | 334 |   |
|                           |       |                        |       | 18,633                |       | 18,118 |   |

 

F-25

----

 
| ** **                                 | ** ** | **Annual  average rate of** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **depreciation**            | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accumulated depreciation and amortization- |       |                        |       |                  |       |   |   |
| Generation                                 |       |                        |       | (4,202                | )          | (3,993 | ) |
| Generation - Consortia                     |       |                        |       | (21                   | )          | (11 | ) |
| Transmission                               |       |                        |       | (848                  | )          | (800 | ) |
| Distribution                               |       |                        |       | (3,848                | )          | (3,553 | ) |
| Administration                             |       |                        |       | (345                  | )          | (330 | ) |
| Gas                                        |       |                        |       | —                |       | (18 | ) |
| Telecom                                    |       |                        |       | (81                   | )          | (52 | ) |
|                                       |       |                        |       | (9,345                | )          | (8,757 | ) |
| Total in service                           |       |                        |       | 9,288                 |       | 9,361 |   |
| Construction in progress-                  |       |                        |       |                  |       |   |   |
| Generation                                 |       |                        |       | 946                   |       | 549 |   |
| Generation - Consortia                     |       |                        |       | 493                   |       | 524 |   |
| Transmission                               |       |                        |       | 35                    |       | 90 |   |
| Distribution                               |       |                        |       | 366                   |       | 336 |   |
| Administration                             |       |                        |       | 53                    |       | 34 |   |
| Gas                                        |       |                        |       | —                |       | 18 |   |
| Telecom                                    |       |                        |       | 10                    |       | 5 |   |
| Total in construction in progress          |       |                        |       | 1,903                 |       | 1,556 |   |
| Total                                      |       |                        |       | 11,191                |       | 10,917 |   |

 

Interestcost capitalized during the years ended December 31, 2004, 2003 and 2002was R$194, R$131, and R$74, 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.

 

CEMIG has lands andbuildings recorded under Property, plant and equipment – Administration, whichhave been pledged in connection with legal proceedings related to tax, labor,civil and other contingencies in the amount of R$11. Such contingencies areincluded in accrued liabilities for contingencies (see note 17).

 

Construction in Progress– Generation includes the costs incurred related to the Irapé power plant inthe amount of R$ 802 (R$355 in 2003).

 

Consortia

 

CEMIG is a partner incertain consortia for electricity generation projects. Each partner has theright to take energy generated by the power plant in an amount proportionate tothe partner’s investment. These projects are governed by executory contractswhich establish the rights and obligations of each party.

 

F-26

----

 

CEMIG’s participation inconsortia, represented by amounts already invested in the projects, is asfollows:

 
| ** **                                   | ** ** | **CEMIG’s  participation** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| ** **                                   | **2004**   | ** **                      | **2003**   | ** **            |
| ** **                                   | ** ** | **%**                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service-                                  |       |                            |       |                  |       |   |   |
| Queimado Hydroelectric Power Plant           |       | 82.50                           |       | 207                   |       | — |   |
| Funil Hydroelectric Power Plant              |       | 49.00                           |       | 153                   |       | 153 |   |
| Igarapava Hydroelectric Power Plant          |       | 14.50                           |       | 56                    |       | 56 |   |
| Porto Estrela Hydroelectric Power Plant      |       | 33.33                           |       | 54                    |       | 54 |   |
| (-) Accumulated depreciation                 |       |                            |       | (21                   | )          | (11 | ) |
|                                         |       |                            |       | 449                   |       | 252 |   |
| Construction in progress-                    |       |                            |       |                  |       |   |   |
| Aimorés Hydroelectric Power Plant       |       | 49.00                           |       | 467                   |       | 305 |   |
| Cemig Capim Branco Hydroelectric Power Plant |       | 21.05                           |       | 24                    |       | 17 |   |
| Funil Hydroelectric Power Plant              |       | 49.00                           |       | 2                     |       | — |   |
| Queimado Hydroelectric Power Plant           |       | 82.50                           |       | —                |       | 202 |   |
|                                         |       |                            |       | 493                   |       | 524 |   |
|                                         |       |                            |       | 942                   |       | 776 |   |

 

The participation of the other partners in energygeneration from consortia is as follows:

 
| **Consortium**             | ** ** | **Shareholders**                                              | ** ** | **Interest (%)** | ** ** |
|----------------------------|------------|---------------------------------------------------------------|------------|------------------|------------|
|                       |       |                                                          |       |             |       |
| Porto Estrela              |       | Companhia de  Tecidos Nortes de Minas Gerais – COTEMINAS |       | 33.34            |       |
|                       |       | Companhia Vale do  Rio Doce – CVRD                       |       | 33.33            |       |
|                       |       |                                                          |       |             |       |
| Igarapava                  |       | Companhia Vale do  Rio Doce – CVRD                       |       | 38.15            |       |
|                       |       | Companhia Mineira  de Metais – CMN                       |       | 23.93            |       |
|                       |       | Companhia  Siderúrgica Nacional - CSN                    |       | 17.92            |       |
|                       |       | Mineração Morro  Velho - MMV                        |       | 5.50             |       |
|                       |       |                                                          |       |             |       |
| Funil                      |       | Companhia Vale do  Rio Doce - CVRD                            |       | 51.00            |       |
|                       |       |                                                          |       |             |       |
| Queimado                   |       | Companhia  Energética de Brasília                   |       | 17.50            |       |
|                       |       |                                                          |       |             |       |
| Aimorés               |       | Companhia Vale do  Rio Doce - CVRD                            |       | 51.00            |       |
|                       |       |                                                          |       |             |       |
| Capim Branco  Energia S.A. |       | Companhia Vale do  Rio Doce - CVRD                            |       | 48.42            |       |
|                       |       | Comercial e  Agrícola Paineiras Ltda.                    |       | 17.89            |       |
|                       |       | Companhia Mineira  de Metais - CMN                            |       | 12.63            |       |

 

F-27

----

 

**12. ACCOUNTS PAYABLE TO SUPPLIERS**

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Electricity suppliers-                                                               |       |                  |       |   |   |
| Eletrobrás –  Energy from Itaipu                                           |       | 166                   |       | 178 |   |
| Furnas Centrais Elétricas S.A. (indexed to U.S.  dollar)                        |       | 31                    |       | 52 |   |
| Spot market – CCEE/MAE                                                          |       | 149                   |       | 146 |   |
| Payments to generators for energy purchased on  CCEE/MAE during the rationing period |       | 364                   |       | 412 |   |
| Others                                                                               |       | 47                    |       | 41 |   |
|                                                                                 |       | 757                   |       | 829 |   |
|                                                                                 |       |                  |       |   |   |
| Supplies and services                                                                |       | 137                   |       | 114 |   |
|                                                                                 |       | 894                   |       | 943 |   |
|                                                                                 |       |                  |       |   |   |
| Current liabilities                                                                  |       | 648                   |       | 618 |   |
| Long-term liabilities                                                                |       | 246                   |       | 325 |   |

 

CCEE/MAE obligations inthe amount of R$143, which are fully reserved, were not paid due to aninjunction granted to CEMIG in December 2002 that changed the criteria tocalculate its obligation, as mentioned in Note 4. The eventual payment of thisadditional obligation depends on the conclusion of CCEE/MAEE calculations,considering the negotiations between CEMIG and CCEE/MAEE agents described onNote 4.

 

**13. TAXES PAYABLE**

 

Thefollowing table describes accrued taxes payable:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Short-term -                 |       |                  |       |   |   |
| Income tax                   |       | 159                   |       | 80 |   |
| Social contribution tax      |       | 60                    |       | 31 |   |
| VAT                          |       | 169                   |       | 142 |   |
| Tax on billing – COFINS |       | 56                    |       | 33 |   |
| Others                       |       | 36                    |       | 35 |   |
|                         |       | 480                   |       | 321 |   |
| Long-term -                  |       |                  |       |   |   |
| Tax on billing – COFINS |       | 139                   |       | 84 |   |
| Tax on billing – PASEP  |       | 27                    |       | 16 |   |
|                         |       | 166                   |       | 100 |   |
|                         |       | 646                   |       | 421 |   |

 

The federal taxesclassified in long-term liabilities refer to part of the net deferredobligations and rights on assets and liabilities arising from the GeneralAgreement of the Electricity Sector and the deferred rate adjustment, which aredue based on the realization of these assets and liabilities. These taxes arerecorded based on the rates expected to be in force upon realization. Theincome tax and the social contribution tax arising from these events arerecorded as Deferred income taxes (see Note 5).

 

F-28

----

 

**14. FINANCING**

 

(a) The following tables describe financings:

 
| **LENDERS**                                           |   | **Payments  of Principal** |   | **Annual  Interest  rates****(%)** |   | **2004**  |   | **2003** |   |
|-------------------------------------------------------|--------|----------------------------|--------|------------------------------------|--------|-----------|--------|----------|--------|
| **Currency**                                          |   | **Short  term**            |   | **Long  Term**                     |   | **Total** |   |
| **Total**                                             |
| IN FOREIGN  CURRENCY                                  |   |                       |   |                               |   |      |   |     |   |   |   |   |   |   |   |
| ABN AMRO Bank – N.V.                             |   | Semi-annually through 2005 |   | Libor + 4.25                       |   | US$       |   | 9        |   | — |   | 9 |   | 29 |   |
| ABN AMRO Real S.A. I, II e III                   |   | Semi-annually through 2009 |   | 6.35                               |   | US$       |   | 1        |   | 77 |   | 78 |   | — |   |
| Banco BNL do Brasil S.A.                              |   | Semi-annually through 2005 |   | Libor + 0.50                       |   | US$       |   | 13       |   | — |   | 13 |   | 16 |   |
| Banco do Brasil S.A. – Various  bonus (1)        |   | Semi-annually through 2024 |   | Various                            |   | US$       |   | 24       |   | 187 |   | 211 |   | 250 |   |
| Banco do Brasil S.A. I                                |   | Single payment in 2004     |   | 1.40                               |   | JPY       |   | —   |   | — |   | — |   | 99 |   |
| Banco do Brasil S.A. II                               |   | Semi-annually through 2004 |   | Libor + 3.13                       |   | US$       |   | —   |   | — |   | — |   | 41 |   |
| Banco do Brasil S.A. III                              |   | Single payment in 2004     |   | 10.38                              |   | US$       |   | —   |   | — |   | — |   | 119 |   |
| Banco do Brasil S.A. V                                |   | Single payment in 2005     |   | 1.30                               |   | JPY       |   | 81       |   | — |   | 81 |   | 83 |   |
| Banco do Brasil S.A. VI                               |   | Single payment in 2009     |   | 3.90                               |   | JPY       |   | —   |   | 101 |   | 101 |   | — |   |
| Banco Interamericano de  Desenvolvimento -BID         |   | Semi-annually through 2006 |   | 4.00 a 7.67                        |   | US$       |   | 13       |   | 6 |   | 19 |   | 35 |   |
| Banco Itaú – BBA I                          |   | Semi-annually through 2004 |   | 3.70                               |   | US$       |   | —   |   | — |   | — |   | 120 |   |
| Banco Itaú – BBA II (2)                     |   | Single payment in 2005     |   | Various                            |   | US$       |   | 83       |   | — |   | 83 |   | 90 |   |
| Banco Itaú – BBA III                        |   | Semi-annually through 2004 |   | 3.69                               |   | US$       |   | —   |   | — |   | — |   | 111 |   |
| Banco Itaú – S.A. I                         |   | Semi-annually through 2007 |   | Libor + 3.25                       |   | US$       |   | 47       |   | 66 |   | 113 |   | 148 |   |
| Banco Itaú – S.A. II                        |   | Annually through 2004      |   | Libor + 2.45                       |   | US$       |   | —   |   | — |   | — |   | 49 |   |
| Citibank N.A II                                       |   | Annually through 2004      |   | Libor + 5.50                       |   | US$       |   | —   |   | — |   | — |   | 34 |   |
| Citibank N.A III                                      |   | Single payment in 2004     |   | 10.00                              |   | US$       |   | —   |   | — |   | — |   | 33 |   |
| Citibank N.A IV                                       |   | Semi-annually through 2005 |   | Libor + 4.25                       |   | US$       |   | 7        |   | — |   | 7 |   | 23 |   |
| ING Bank – Eurobônus                        |   | Single payment in 2004     |   | 9.13                               |   | US$       |   | —   |   | — |   | — |   | 79 |   |
| KFW                                                   |   | Semi-annually through 2016 |   | 4.50                               |   | EURO      |   | 2        |   | 26 |   | 28 |   | 31 |   |
| LLoyds Tsb Bank Plc                                   |   | Semi-annually through 2004 |   | Libor + 6.00                       |   | US$       |   | —   |   | — |   | — |   | 7 |   |
| Siemens LTDA, I                                       |   | Semi-annually through 2004 |   | Libor + 4.25                       |   | US$       |   | —   |   | — |   | — |   | 91 |   |
| Siemens LTDA, II                                 |   | Semi-annually through 2005 |   | 9.97                               |   | US$       |   | 22       |   | — |   | 22 |   | 47 |   |
| UNIBANCO I, II e III                             |   | Single payment in 2009     |   | 6.50                               |   | US$       |   | —   |   | 190 |   | 190 |   | — |   |
| UNIBANCO IV                                           |   | Single payment in 2009     |   | 5.50                               |   | US$       |   | —   |   | 5 |   | 5 |   | — |   |
| UNIBANCO V                                            |   | Single payment in 2009     |   | 5.00                               |   | US$       |   | —   |   | 23 |   | 23 |   | — |   |
| MBK Furukawa Sistemas S.A. / Unibanco                 |   | Semi-annually through 2008 |   | Libor + 5.45                       |   | US$       |   | 17       |   | 41 |   | 58 |   | 81 |   |
| Toshiba do Brasil S.A.                                |   | Quarterly through 2009     |   | Libor 6.00                         |   | US$       |   | 4        |   | 12 |   | 16 |   | 18 |   |
| Other                                                 |   | Various                    |   | Various                            |   | Various   |   | 19       |   | 43 |   | 62 |   | 78 |   |
| Total foreign currency financing                      |   |                       |   |                               |   |      |   | 342      |   | 777 |   | 1,119 |   | 1,712 |   |
|                                                  |   |                       |   |                               |   |      |   |     |   |   |   |   |   |   |   |
| IN LOCAL CURRENCY -                                   |   |                       |   |                               |   |      |   |     |   |   |   |   |   |   |   |
| Banco Credit Suisse First Boston S.A.                 |   | Various                    |   | 100.00 do CDI                      |   | R$        |   | —   |   | 66 |   | 66 |   | — |   |
| Banco do Brasil                                       |   | Single payment in 2009     |   | 111.00 do CDI                      |   | R$        |   | 3        |   | 119 |   | 122 |   | — |   |
| Banco Itaú – BBA IV                         |   | Single payment in 2004     |   | CDI + 3.90                         |   | R$        |   | —   |   | — |   | — |   | 302 |   |
| Banco Itaú – BBA V                          |   | Single payment in 2008     |   | IGP-M (5) + 10.48             |   | R$        |   | 12       |   | 213 |   | 225 |   | — |   |
| Banco Itaú – BBA VI                         |   | Annually through 2008      |   | CDI + 2.00                         |   | R$        |   | 3        |   | 100 |   | 103 |   | — |   |
| Banco Votorantim S.A.                                 |   | Single payment in 2010     |   | 113.00 do CDI                      |   | R$        |   | —   |   | 54 |   | 54 |   | — |   |
| BNDES                                                 |   | Monthly through 2008       |   | SELIC + 1.00                       |   | R$        |   | 102      |   | 288 |   | 390 |   | 475 |   |
| Bradesco I, II, III,  IV, V, VI, VII e VIII |   | Single Payment in 2005     |   | 107.50 do CDI                      |   | R$        |   | 218      |   | — |   | 218 |   | — |   |
| Debêntures I (3)                                 |   | Annually through 2006      |   | IGP-M + 12.70                      |   | R$        |   | 504      |   | 485 |   | 989 |   | 879 |   |
| Debêntures II - Governo do  Estado de M.G. (4)   |   | Annually from 2027 to 2028 |   | IGP-M                              |   | R$        |   | —   |   | 8 |   | 8 |   | 50 |   |
| Debêntures III (3)                               |   | Single payment in 2014     |   | IGP-M + 10.50                      |   | R$        |   | 15       |   | 246 |   | 261 |   | — |   |
| ELETROBRÁS I                                     |   | Monthly through 2013       |   | FINEL (6) + 6.50              |   | R$        |   | 17       |   | 109 |   | 126 |   | 139 |   |
| ELETROBRÁS II                                    |   | Monthly through 2005       |   | IGP-M + 10.00                      |   | R$        |   | 52       |   | — |   | 52 |   | 88 |   |
| ELETROBRÁS III                                   |   | Various                    |   | UFIR (7), RGR + 5.00  a 8.00  |   | R$        |   | 28       |   | 133 |   | 161 |   | 110 |   |
| Large Consumers - TELEMIG/ C.V.R.D.                   |   | Various                    |   | Various                            |   | R$        |   | 3        |   | 6 |   | 9 |   | 8 |   |
| HSBC I e II                                           |   | Single Payment in 2005     |   | 104.00 do CDI                      |   | R$        |   | 33       |   | — |   | 33 |   | — |   |
| UHESC S.A.                                            |   | Annually through 2005      |   | IGP-M + 14.66                      |   | R$        |   | 63       |   | — |   | 63 |   | 56 |   |
| UNIBANCO                                              |   | Single payment in 2009     |   | CDI + 2.98                         |   | R$        |   | 4        |   | 104 |   | 108 |   | 103 |   |
| Other                                                 |   | Various                    |   | Various                            |   | R$        |   | 18       |   | 42 |   | 60 |   | 69 |   |
| Total local currency financing                        |   |                       |   |                               |   |      |   | 1,075    |   | 1,973 |   | 3,048 |   | 2,279 |   |
| TOTAL                                                 |   |                       |   |                               |   |      |   | 1,417    |   | 2,750 |   | 4,167 |   | 3,991 |   |

 

----

(1)     Theseinterest rates vary from 2.00 to 8.00 % per year;

 

F-29

----

 

(2)     SemiannualLibor plus a spread from 0.81 to 0.88% per year for floating-rate obligations.These interest rates vary from 3.90 to 5.00 % per year for fixed-rate obligations.

 

(3)     SimpleDebentures, not convertible into shares and without any preferences orguarantees or issuance of certificates. The debentures accrue annual interestas defined in the bookbuilding process.

 

(4)     Theannual shareholders’ meeting on April 30, 2002 approved the issuance ofdebentures in the total amount of R$90 to be acquired by the State Government.These debentures are issuable in series, are not convertible into shares ofCEMIG, do not have any preference or guarantee, mature within 25 years from the date of issuance and will be restatedbased on the IGP-M index, without interest. The funds to be obtained from theseissuances will be used for the construction of the Irapé Power Plant. TheCompany issued the first three series in the amount of R$23 from 2002 to 2004.The State Government is settling these debentures with the funds from its shareof CEMIG’s dividends.

 

(5)     *IGP-M - ÍndiceGeral de Preços de Mercado* (General Market Price Index)

 

(6)     *FINEL - ÍndiceInterno da Eletrobrás*(Eletrobrás Internal Index)

 

(7)     *UFIR - UnidadeFiscal de Referência*(TaxReference Unit)

 

The escrow deposits madein compliance with Resolution No. 2,515 of June 29, 1998 of theBrazilian Central Bank are classified as Restricted investments – Current andOther assets (note 7).

 

In addition to thefinancings described above, the Company has unused credit lines with financialinstitutions as of December 31, 2004 in the amount of R$94.

 

Most of the Company’sfinancing are guaranteed by the Federal and State governments and the proceedsof the financings have generally been used by the Company for working capitaland to finance the expansion of its electric power generation, transmission anddistribution systems.

 

CEMIG has pledged itsrights to future revenues related to electricity sales in the amount ofR$1,075. These rights serve as collateral for certain financing.

 

(b) Composition offoreign financings by currency and domestic currency indices:

 
| ** **                                                                                                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Currency -                                                                                                                |       |                  |       |   |   |
| United States Dollars                                                                                                     |       | 857                   |       | 1,424 |   |
| Japanese yen                                                                                                              |       | 182                   |       | 182 |   |
| Euro                                                                                                                      |       | 61                    |       | 69 |   |
| Currency baskets                                                                                                          |       | 18                    |       | 33 |   |
| Others                                                                                                                    |       | 1                     |       | 4 |   |
|                                                                                                                      |       | 1,119                 |       | 1,712 |   |
| Index -                                                                                                                   |       |                  |       |   |   |
| *Índice  Geral de Preços de Mercado**–* “IGP-M”  (General Market Price Index)                    |       | 1,606                 |       | 1,085 |   |
| Certificado de  Depósito Interbancário – CDI(Interbank deposit rate)                                       |       | 704                   |       | 405 |   |
| *Sistema  Especial de Liquidação e Custódia**–*“SELIC”  (Brazilian benchmark interest rate) |       | 390                   |       | 475 |   |
| *Unidade  Fiscal de Referência**–*“UFIR”  (Tax Reference Unit)                                        |       | 161                   |       | 110 |   |
| *Índice Interno da Eletrobrás**–*“FINEL” (Eletrobrás Internal Index)                        |       | 126                   |       | 139 |   |
| Others                                                                                                                    |       | 61                    |       | 65 |   |
|                                                                                                                      |       | 3,048                 |       | 2,279 |   |
|                                                                                                                      |       | 4,167                 |       | 3,991 |   |

 

F-30

----

 

(c) The following tablesets forth the variations for the periods indicated in the foreign currency /Brazilian *real* exchange rates forthe principal foreign currencies used to restate financing, expressed as apercentage:

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Currency-             |       |                             |       |   |   |   |   |
| Currency baskets      |       | 2.81                             |       | 3.63 |   | 60.32 |   |
| Euro                  |       | (0.85                            | )          | (7.78 | ) | 79.35 |   |
| Japanese Yen          |       | (7.02                            | )          | (9.30 | ) | 68.18 |   |
| United States Dollars |       | (8.74                            | )          | (18.23 | ) | 52.27 |   |

 

(d) The following tablesets forth the variations for the periods indicated of the principal indicesapplied to domestic currency financing, in percentages:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Index-     |       |                             |       |   |   |   |   |
| SELIC      |       | 16.24                            |       | 23.41 |   | 19.37 |   |
| CDI        |       | 16.16                            |       | 23.33 |   | 19.09 |   |
| IGP-M      |       | 12.41                            |       | 8.71 |   | 25.31 |   |
| FINEL      |       | 2.38                             |       | 1.70 |   | 4.67 |   |

 

(e) Maturitiesof the long-term financing:

 
| ** **          | ** ** | **As of December 31,  2004** | ** ** |
|---------------------|------------|-----------------------------------|------------|
|                |       |                              |       |
| 2006                |       | 861                               |       |
| 2007                |       | 462                               |       |
| 2008                |       | 437                               |       |
| 2009                |       | 436                               |       |
| 2010                |       | 97                                |       |
| 2011 and thereafter |       | 457                               |       |
|                |       | 2,750                             |       |

 

(f) RestrictiveCovenants

 

Certainof CEMIG’s loans, financing agreements and debentures contain certaincovenants, calculated according to Brazilian Corporate Law, which the Companyhas complied with as of December 31, 2004 as described below:

 

 
| **Description of the Restrictive Clause** | ** ** | **Required Rate**             | ** ** | **Position on  December31, 2004  according to Brazilian  Corporate Law** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------------|------------|
| EBITDA/Debts                              |       | Greater than or  equal to 3.0 |       | 6.50                                                                     |       |
| Debts/EBITDA                              |       | Less than or  equal to 2.5    |       | 1.56                                                                     |       |
| Net fixed asset/Assets                    |       | Greater than or  equal to 30% |       | 49                                                                       | %          |
| Shareholders’ equity/Assets          |       | Greater than or  equal to 30% |       | 43                                                                       | %          |
| EBITDA/Financial Income                   |       | Greater than or  equal to 2.0 |       | 8.06                                                                     |       |
| Net debts/EBITDA (*)                      |       | Less than or  equal to 3.25   |       | 1.47                                                                     |       |
| EBITDA/Debts                              |       | Greater than or  equal to 2.8 |       | 5.63                                                                     |       |
| Debts/EBITDA                              |       | Less than or  equal to 3.36   |       | 1.80                                                                     |       |
| Debts/Shareholders’ equity + debts   |       | Less than or  equal to 53%    |       | 37                                                                       | %          |
| Current debts/EBITDA                      |       | Less than or  equal to 90%    |       | 60                                                                       | %          |
| Investiment/EBITDA                        |       | Less than or  equal to 60%    |       | 43                                                                       | %          |

 

----

(*)                                 Net debt = Total debt less cash balance andnegotiable valuesEBITDA = Earnings Before Interest, Taxes, Depreciation and AmortizationSome contracts established specific criteria to define EBITDA to be usedin the covenants calculations.

 

F-31

----

 

Empresade Infovias S.A.’ financing contract with MBK Furukawa Sistemas S.A. /Unibanco, in the amount of R$58 as of December 31, 2004, of which R$41 isclassified under long-term liabilities, contains certain covenants with whichEmpresa de Infovias S.A. has not complied. These covenants are based on thefinancial statements prepared in accordance with the accounting practicesadopted in Brazil. Empresa de Infovias S.A. has obtained a waiver from thecreditors that are parties to this contract. The waiver affirms that suchcreditors will not exercise their rights to demand accelerated or immediatepayment of the total amount due until December 31, 2005. This financing isclassified in current and long-term liabilities according to the original termsof the respective contract, in light of the waiver obtained. CEMIG guaranteesthis contract and any payments made by CEMIG will be converted into preferredshares of Empresa de Infovias S.A..

 

**15. REGULATORY CHARGES PAYABLE**

 

Thefollowing table describes the Company’s accrued regulatory charges payable:

 
| ** **                         | ** ** | **December, 31** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Global reserve for reversion quota |       | 42               |       | 60 |   |
| Fuel usage quota                   |       | 36               |       | 7 |   |
| Emergency capacity charge          |       | 56               |       | 51 |   |
| Energy development account         |       | 18               |       | 13 |   |
| Other                              |       | 3                |       | 3 |   |
|                               |       | 155              |       | 134 |   |

 

(a) Global reserve for reversion quota:

 

Theglobal reserve for reversion quota was established as a fund managed byELETROBRÁS (*Centrais ElétricasBrasileiras S.A*., the Federal Government-owned holding company forinvestments in the Brazilian power sector)for the purpose of reimbursement of electricity companies’ investments whentheir concessions expire and assets subject to the concession revert to theFederal Government. It is funded through assessments on power companies and isbased on 2.5% of assets in service, limited to 3% of total annual operatingrevenues, net of value-added tax on sales to final customers.

 

(b) Fuel usage quota:

 

Thefuel usage quota represents contributions made by the electricity companyconcessionaires to subsidize the cost of fuel used in the thermoelectric energygenerating process in the Brazilian energy system.

 

(c) Emergency capacity charge:

 

Theemergency capacity charge represents a charge established in 2002, which isprorated among final consumers of electric energy, and relates to theacquisition of energy and contracted generation capacity by the *Comercializadora Brasileira de Energia Elétrica*(The Brazilian Emergency Energy Trader or “CBEE”).

 

(d) Energydevelopment account:

 

Theenergy development account was created by Law No. 10,438/02 to fosterenergy development in the states and to promote competition regarding energyproduced through wind farms, small hydroelectric power plants, biomass, naturalgas and coal. The amounts to be paid by CEMIG were defined by ANEEL Resolution No. 42dated January 31, 2003.

 

F-32

----

 

**16. EMPLOYEE POST-RETIREMENT BENEFITS**

 

TheCompany sponsors a pension plan, administered by *Fundação Forluminas de Seguridade Social* - FORLUZ(Forluminas Social Security Foundation, or “FORLUZ”) covering substantially allof its employees. With respect to such plan, SFAS 87 “Employers’ Accounting forPensions” has been applied from and after January 1,1995. However,amortization of the net transition obligation existing at January 1, 1995has been computed retroactively as if it had been established on January 1,1989, which is the date that SFAS 87 first became applicable for non-U.S.pension funds.

 

UntilOctober 1997, the Company sponsored only a defined benefit pension plan.From September 29, 1997 to May 1, 1998, participants were permittedto elect to migrate to a new defined contribution plan. Those participants whoelected to join the new plan had two options. The first was to maintain thebenefit earned up to the date of migration in the defined benefit plan, with nofurther increases for salary increases or future services, and futurecontributions would be made to the new plan to the individual account. Thesecond option for those participants who migrated to the defined contributionplan was to transfer the accumulated benefit as of that date to theirindividual account in the defined contribution plan. In both alternatives, theparticipants became fully vested in the benefits accumulated as of themigration date.

 

Underthe defined contribution plan the Company will match the employees’ contributionsfrom 3% to 12% of each employee’s salary, depending on certain factors. Thetotal assets in the defined contribution plan (which is also administered byFORLUZ) as of December 31, 2004 and 2003 was R$1,109 and R$865,respectively, and the contribution expense for the years ended December 31,2004, 2003 and 2002 was R$37, R$31 and R$22, respectively.

 

CEMIGhas also established post-retirement health care plans and pays life insurancepremiums for retirees. The accounting for these benefits is in accordance withSFAS 106 “Employers’ Accounting for Post-retirement Benefits other thanPensions”.

 

CEMIGhas offered to its employees an incentive for early retirement, which consistsof an additional amount, paid when the employee retires, of 10% of the employees’salary for each year worked for the Company. To obtain this benefit theemployee must opt in writing indicating his intention to retire early.Accordingly, the costs of this incentive are recognized on accrual basis. CEMIGmay withdraw this additional benefit at anytime.

 

CEMIGuses a December 31 measurement date for its employee post-retirementbenefits.

 

Amortization of deficit inactuarial reserves

 

Part of the post-retirement benefit liabilities, in the amount ofR$1,555, as of December 31, 2004 (R$1,539 as of December 31, 2003),was recognized as obligations payable by the Company. These obligations arebeing amortized through monthly installments, through June 2024,calculated under the fixed-installment system (“Price Table”). Part ofthese amounts is restated annually according to the salary adjustment index forthe Company’s employees (not including productivity) included in the definedbenefit plan, and part is adjusted according to the IPCA – IPEAD (consumerprice index calculated by the Minas Gerais Accounting Management and EconomicResearch Institute of Minas Gerais Federal University), plus 6% per year.

 

In case FORLUZ reports a surplus for three consecutive years, suchsurplus may be used to reduce CEMIG’s obligations mentioned in the previousparagraph, as contractually agreed.

 

F-33

----

 

Thechange in benefit obligations for the years ended December 31, 2004 and2003 is as follows:

 
| ** **                                  | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care  and insurance** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**               | ** ** |
| ** **                                  | ** ** | **2004**                         | ** ** | **2003**                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benefit obligation – beginning of year |       | 3,485                            |       | 2,752                                          |       | 512 |   | 438 |   |
| Service cost                                |       | 6                                |       | 6                                              |       | 25 |   | 14 |   |
| Interest cost                               |       | 449                              |       | 353                                            |       | 66 |   | 57 |   |
| Actuarial loss                              |       | 897                              |       | 579                                            |       | 144 |   | 4 |   |
| Plan amendment                              |       | —                           |       | 46                                             |       | — |   | 35 |   |
| Benefits paid to participants               |       | (339                             | )          | (251                                           | )          | (41 | ) | (36 | ) |
| Benefit obligation - end of year            |       | 4,498                            |       | 3,485                                          |       | 706 |   | 512 |   |

 

The change in plan assetsfor the years ended December 31, 2004 and 2003 is as follows:

 
| ** **                                         | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care  and insurance** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**               | ** ** |
| ** **                                         | ** ** | **2004**                         | ** ** | **2003**                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fair value of plan assets – beginning of year |       | 2,584                            |       | 2,112                                          |       | 16 |   | 9 |   |
| Employer contributions                             |       | 210                              |       | 207                                            |       | 25 |   | 23 |   |
| Employee contributions                             |       | —                           |       | —                                         |       | 21 |   | 18 |   |
| Actual return on plan assets                       |       | 610                              |       | 516                                            |       | 11 |   | 2 |   |
| Benefits paid to participants                      |       | (339                             | )          | (251                                           | )          | (41 | ) | (36 | ) |
| Fair value of plan assets – end of year       |       | 3,065                            |       | 2,584                                          |       | 32 |   | 16 |   |

 

Thefunded status of the defined benefit pension plan and post-retirement healthcare and insurance is as follows:

 
| ** **                                                                          | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care  and insurance** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                          | ** ** | **December 31,**            | ** ** | **December 31,**                          | ** ** |
| ** **                                                                          | ** ** | **2004**                         | ** ** | **2003**                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Projected benefit obligation in excess of plan  assets                              |       | 1,433                            |       | 901                                            |       | 674 |   | 496 |   |
| Unrecognized net transition obligation, being  recognized from January 1, 1995 |       | —                           |       | —                                         |       | (27 | ) | (33 | ) |
| Unrecognized prior service cost                                                     |       | (43                              | )          | (46                                            | )          | (33 | ) | (35 | ) |
| Unrecognized net actuarial gain (loss)                                              |       | (826                             | )          | (116                                           | )          | (176 | ) | (46 | ) |
|                                                                                |       |                             |       |                                           |       |   |   |   |   |
| Accrued pension liability                                                           |       | 564                              |       | 739                                            |       | 438 |   | 382 |   |
| Additional minimum liability – Other comprehensive  income                     |       | 804                              |       | 87                                             |       | — |   | — |   |
| Total accrued pension liability                                                     |       | 1,368                            |       | 826                                            |       | 438 |   | 382 |   |

 

F-34

----

 

The components of netperiodic benefit costs for the years ended December 31, 2004, 2003 and2002 are as follows:

 
| ** **                            | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care and  insurance** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**               | ** ** |
| ** **                            | ** ** | **2004**                         | ** ** | **2003**                                       | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                          |       | 6                                |       | 6                                              |       | 6 |   | 25 |   | 14 |   | 25 |   |
| Interest cost                         |       | 449                              |       | 353                                            |       | 340 |   | 66 |   | 57 |   | 56 |   |
| Expected return on plan assets        |       | (422                             | )          | (346                                           | )          | (197 | ) | (7 | ) | (2 | ) | (1 | ) |
| Amortization of transition obligation |       | —                           |       | —                                         |       | — |   | 6 |   | 5 |   | 6 |   |
| Amortization of loss (gain)           |       | —                           |       | (1                                             | )          | 6 |   | 3 |   | 2 |   | 3 |   |
| Expected Employee contribution        |       | —                           |       | —                                         |       | — |   | (18 | ) | (10 | ) | (11 | ) |
| Curtailment gain                      |       | —                           |       | —                                         |       | — |   | — |   | — |   | (48 | ) |
| Net periodic benefit cost             |       | 33                               |       | 12                                             |       | 155 |   | 75 |   | 66 |   | 30 |   |

 

The components of theprojected net periodic post-retirement benefit costs for 2005 are as follows:

 
| ** **                            | ** ** | **Defined benefit  pension plan** | ** ** | **Post-retirement  health care and  insurance** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------|------------|
| Service cost                          |       | 7                                 |       | 9                                               |       |
| Interest cost                         |       | 491                               |       | 77                                              |       |
| Expected return on plan assets        |       | (437                              | )          | (5                                              | )          |
| Amortization of prior service cost    |       | 3                                 |       | 2                                               |       |
| Amortization of transition obligation |       | —                            |       | 5                                               |       |
| Amortization of loss (gain)           |       | 27                                |       | 10                                              |       |
|                                  |       | 91                                |       | 98                                              |       |

 

The weighted-averageasset allocations by asset category is as follows:

 
| ** **             | ** ** | **Defined benefit pension plan  and Post-retirement health care** | ** ** |
|------------------------|------------|-------------------------------------------------------------------|------------|
| ** **             | ** ** | **Asset allocation  at December 31,**                        | ** ** | **Target asset allocation  percentage or range of** | ** ** |
| **Type of investment** | ** ** | **2004**                                                          | ** ** | **2003** | ** ** | **Percentage’s** | ** ** |
|                   |       |                                                              |       |   |   |   |   |
| Debt Securities        |       | 83.52                                                             | %          | 85.07 | % | From 70% to 100% |   |
| Equity Securities      |       | 10.48                                                             | %          | 8.67 | % | Up to 15% |   |
| Real Estate            |       | 3.33                                                              | %          | 4.02 | % | Up to 8% |   |
| Participant loans      |       | 2.67                                                              | %          | 2.24 | % | 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, 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.

 

F-35

----

 

Benchmarks for investing plan assets:

 

•                  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 NationalIndex)

(2)          *Indice de Preços ao consumidoramplo*- IPCA (Consumer priceindex calculated by the Brazilian Institute of Geography and Statistics– IBGE)

(3)          *Indice da Bolsa de Valores de São Paulo*–IBOVESPA (Index which represents the variation of the main shares negotiated onSâo Paulo Stock exchange)

 

As of December 31,2004 and 2003, the pension plan assets includes securities issued by CEMIG asfollows:

 
| ** ** | ** ** | **Defined benefit pension plan** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **December 31, 2004**       | ** ** | **December 31, 2003** | ** ** |
|       |       |                             |       |   |   |
| Debentures |       | 212                              |       | 202 |   |
| Shares     |       | —                           |       | 40 |   |
|       |       | 212                              |       | 242 |   |

 

Assumptions used by theCompany were as follows (percentage including projected inflation of 5% perannum):

 
| ** **                            | ** ** | **Defined benefit pension plan** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2004  %**                      | ** ** | **2003  %** | ** ** |
|                                  |       |                             |       |   |   |
| Actuarial method                      |       | Projected Unit Credit            |       | Projected Unit Credit |   |
| Annual discount rate                  |       | 11.30                            |       | 13.40 |   |
| Annual expected return on plan assets |       | 14.45                            |       | 16.55 |   |
| Annual salary increase                |       | 7.10                             |       | 9.20 |   |
| Annual increase in benefits           |       | 5.00                             |       | 5.00 |   |

 
| Mortality rate                |   | AT - 83      |   | UP-94        |   |
|-------------------------------|--------|--------------|--------|--------------|--------|
| Disability rate               |   | Light Medium |   | Light Medium |   |
| Disable mortality rate        |   | IAPB-57      |   | IAPB-57      |   |
| Expected annual turnover rate |   | 2.00%        |   | 2.00%        |   |

 

TheCompany changed its mortality table in 2004 from UP-94 to AT-83based on studies performed by FORLUZ which concluded that AT-83 betterrepresents the demographic profile of the FORLUZ participants. The mentionedtables do not have material differences between each other and, therefore, thischange did not have a material impact in CEMIG’s statement of operations in2004.

 

TheCompany expects a reduction in the Brazilian interest rate in the long-term.Therefore, the Company  reduced theannual discount rate on post-retirement benefits from 13.40% to 11.30%(assuming an annual inflation rate of 5.00%).

 

Therationale used in determination of long-term return on assets rate describedabove is based in the asset managers mid to long-term expectations and theBrazilian government bonds rates. Additionally, the Company consider asreasonable an expected return on assets which would be equal to discount rateplus 2% or 3%.

 

CEMIG’s obligationrelated to its post-retirement health care plan is calculated using a definedannual contribution per employee during the rest of their lives. Thecontribution amount is not based on the increase or decrease in medical carecost. If the predetermined contributions do not cover future benefit expenses,CEMIG’s employees will be required to make additional contributions or therelated medical

 

F-36

----

 

benefits will be reduced,in accordance with an agreement between CEMIG and the labor union relating tothe health care plan.

 

Estimated FutureBenefit Payments

 

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid:

 
| ** ** | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|
| 2005       |       | 323                  |       | 29                 |       |
| 2006       |       | 326                  |       | 29                 |       |
| 2007       |       | 329                  |       | 30                 |       |
| 2008       |       | 331                  |       | 30                 |       |
| 2009       |       | 332                  |       | 30                 |       |
| 2010-2014  |       | 1,652                |       | 155                |       |
|       |       | 3,293                |       | 303                |       |

 

**17. CONTINGENCIES**

 

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

 

The Company believes thatany loss in excess of the amounts provided for in respect of such contingencieswill not have a material adverse effect on the Company’s results of operationsor financial position.

 

For those contingenciesfor which an adverse outcome has been deemed probable, the Company has madeprovisions for losses as follows:

 
| ** **                       | ** ** | **December 31** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2004**             | ** ** | **2003** | ** ** |
|                             |       |                 |       |   |   |
| Labor claims                     |       | 111                  |       | 91 |   |
| Civil lawsuits - Consumers       |       | 105                  |       | 97 |   |
| Social contribution tax          |       | 69                   |       | 52 |   |
| Finsocial                        |       | 20                   |       | 20 |   |
| ANEEL administrative proceedings |       | 5                    |       | 15 |   |
| Tax and contributions            |       | 60                   |       | 30 |   |
| Civil lawsuits - Others          |       | 28                   |       | 44 |   |
| Others                           |       | 16                   |       | 5 |   |
|                             |       | 414                  |       | 354 |   |

 

CEMIG believes thatshort-term losses were not probable with respect to pending litigation in 2003.Accordingly, the accrual for contingencies has been fully classified as longterm.

 

Certain details relatingto such provisions are as follows:

 

(a) Labor claims:

 

The labor claims relateprincipally to overtime and hazardous occupation compensation. The totalexposure for those matters is estimated to be R$139 as of December 31,2004 (R$113 as of December 31, 2003). CEMIG determines the amounts to bereserved based on the nature of groups of claims and the most recent courtdecisions.

 

F-37

----

 

(b) Civil lawsuits – Consumers:

 

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. Thetotal estimated exposure to the Company for those claims is fully reserved.

 

(c) Social contribution tax:

 

On June 28, 1991,the Federal Government enacted Law No. 8,200, regulating the monetaryrestatement for purposes of the financial statements prepared in accordancewith the accounting practices adopted in Brazil. Under this law, the Companywas required to record complementary monetary restatement, increasing its fixedassets, that was considered, through depreciation, amortization and write-offsof fixed assets, a deductible expense for income tax calculation. Such law didnot clarify the proceedings regarding the deductibility of the complementarymonetary restatement charged to income for social contribution tax purposes.

 

The Company is deductingthe amounts of depreciation, amortization and write-off of the supplementarymonetary restatement of property, plant and equipment, for purposes ofcomputation of social contribution tax. However, the Company has recorded afull provision for this tax contingency.

 

(d) Finsocial:

 

In 1994, CEMIG was finedby the Secretaria da Receita Federal (the Brazilian federal tax authorities)due to the exclusion of State VAT from the Finsocial calculation, a tax onrevenue extinguished in 1992. The total estimated exposure to the Company forthis claim is fully reserved.

 

CEMIG has a Finsocialcontribution dispute involving an amount of R$115 for which CEMIG has recordeda judicial deposit and a loss provision, both equivalent to the historiclitigated amount. In case CEMIG does not succeed in this lawsuit, it will havea loss equivalent to the difference between the loss provision recorded and theactual loss incurred. At the same time, CEMIG will have a financial revenueequal to the difference between the restated balance in the judicial depositaccount and the amount originally deposited, substantially off-setting theincrease in the loss provision.

 

(e) ANEELadministrative proceedings

 

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 itself against such fines. The provision as of December 31,2004 represents the potential loss in those matters.

 

(f) Taxes payable –Suspended liability

 

The recorded provision ofR$60 is related to the deduction of the social contribution tax paid in thecalculation of income tax. CEMIG has a preliminary court order granted by theEighth Civil Court of the Federal Justice, on April 17,1998, for theexemption of payment.

 

(g) Civil lawsuitsand others:

 

Other reserves arerelated to a number of lawsuits involving the Federal Government, in which theCompany is disputing the constitutionality of certain federal taxes that havebeen assessed against it and other general claims arising from the ordinarycourse of business.

 

(h) Contingenciesfor which an adverse outcome has been deemed remote or possible:

 

CEMIG has other relevantlegal proceedings against it for which the Company considers an unfavorableoutcome to be remote or possible. The Company does not expect to incur anylosses with respect to these contingencies and therefore the Company has notrecorded any accruals for such claims. Certain details relating to such mattersare as follows:

 

F-38

----

 

(i) Income andsocial contribution taxes on post retirement benefits:

 

On October 11, 2001,the Brazilian Federal Tax Authorities (Secretaria da Receita Federal) issued anassessment notice, in the updated amount of R$264, arising from the utilizationof tax credits that resulted from the amendment of the Company’s 1997, 1998,1999 and 2000 tax returns. The tax returns were amended as a result of a changein the accounting 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.

 

The tax credits mentionedin the preceding paragraph were offset against federal taxes paid in 2001 and2002. Due to this offset, CEMIG is exposed to additional penalties in theamount of R$217. 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.

 

In 2003, the Federal TaxAuthorities, after performing an inspection of the Company’s tax returns for1997-2001, issued an assessment notice, in the amount of R$1,537,claiming that the Company did not pay all its tax liabilities related to thosetax years. CEMIG submitted an administrative defense requesting that suchassessment notice be canceled, since the Tax Authorities did not consider theCompany’s amended tax returns which have been filed. Such amended tax returnsshow that the Company has properly settled the tax liabilities challenged. Noreserve has been recognized for this claim, since the Company believes that ithas a meritorious defense to such claim, either at the administrative level orin the courts. An adverse outcome in this mater has been deemed remote.

 

(ii) COFINS:

 

The Company begancontesting the payment of COFINS (tax on revenue) in 1992. As a result of anunfavorable court ruling, the Company paid R$239 of COFINS tax on July 30,1999. The Federal Government is claiming that the Company owes approximatelyR$230 in additional fines and interest relating to the non-payment of COFINS.The Company is contesting such claim. No reserve has been recorded for thisclaim, since the Company believes that it has a meritorious defense againstsuch claim and, consequently, does not expect to incur losses related thereto.An adverse outcome in this mater has been deemed remote.

 

(iii) Taxa de ocupação do Solo:

 

Some Municipalities ofthe State of Minas Gerais assessed the Company for the payment of the tax namedTaxa de Ocupação do Solo (tax charged by municipalities due to the use of theland to construct energy distribution network). There are severaladministrative proceedings related to this matter, with the total amount ofapproximately R$11. No reserve has been recorded for these claims, since theCompany believes that it has a meritorious defense against such claims. Anadverse outcome in this mater has been deemed remote.

 

(iv) ITCMD – Imposto de Transmissão Causa Mortis e Doação:

 

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), throughthree fiscal executions, in the amount of R$128. No reserve has been recordedfor these claims, since the Company believes that it has a meritorious defenseagainst such claims. An adverse outcome in this mater has been deemed possible.

 

(v) VAT:

 

In 2004, the StateGovernment filed three administrative proceedings against the Company, in theamount of R$47.  CEMIG filed its defensesin May 2004. No reserve has been recorded for these claims, since theCompany believes that it has a meritorious defense against such claims. Aadverse outcome in this mater has been deemed remote.

 

F-39

----

 

(vi) VAT on lowincome customer subsidy:

 

Since 2002, CEMIG hasbeen receiving a subsidy from ELETROBRÁS to reimburse the Company for lossesincurred as a result of the discount CEMIG was required to provide low incomeconsumers under Federal Law No.10,604/02. Recently, the State of Minas Geraisissued the Decree No. 43,999/05 charging ICMS on this subsidy. The Companybelieves the subsidy is not taxable and it is therefore not collecting the ICMSon the subsidy. The Company may be assessed by the State of Minas Gerais withregard to this matter. CEMIG  estimatesthis possible contingency to be approximately R$35. A adverse outcome in thismater has been deemed possible.

 

(vii) Regulatoryagency acts:

 

ANEEL has a regulatoryproceeding pending against CEMIG claiming that CEMIG owes the FederalGovernment R$509 due to a miscalculation of credits in the amount of thecumulative rate deficit (CRC) applied to reduce amounts owed to the FederalGovernment. On October 31, 2002, ANEEL issued a final administrativedecision against the Company. On January 9, 2004, the Brazilian TreasuryAuthority (“Secretaria do Tesouro Nacional”) issued an Official CollectionLetter, in the amount of R$611, to be paid by January 30, 2004. TheCompany did not make such payment since it believes that it has a meritoriousdefense against such claim and has therefore recorded no reserve in respectthereto. An adverse outcome in this matter has been deemed possible.

 

The Federal PublicAuditing Court (“Tribunal de Contas da União”) which is in charge of theverification the legality of acts performed by the Federal Government and otherfederal entities of including ANEEL, has recently decided that the methodologyadopted by ANEEL for the periodic revision did not consider certain taxbenefits obtained by distribution companies, including CEMIG, thus, causing ahigher rate adjustment applied to rates and harming end consumers. The outcomeof such decision may be a reconsideration by ANEEL of the rate adjustmentdetermined to be applied to CEMIG’s rates in the periodic rate revisionoccurred in April 8, 2003. No reserve has been recorded for this claim,since the Company believes that it has a meritorious defense against such claimand, consequently, does not expect to incur losses related thereto. An adverseoutcome in this matter has been deemed possible.

 

On November 14,2003, the Federal Public Auditing Court, which has the authority to audit anydecision by ANEEL that may impact public finance, initiated an administrativeproceeding against ANEEL to evaluate the criterion adopted by ANEEL in theEnergy Consumption Reduction Emergency Program (Programa Emergencial de Reduçãode Consumo de Energia Elétrica), or PERCEE. The Federal Public Auditing Court has asked us to provide certaininformation with respect to our rates, which, according to the Federal PublicAuditing Court, were mistakenly approved by ANEEL.  If we cannot provide support for these ratesand ANEEL fails to confirm the legality of the criterion adopted, CEMIG mayincur losses in the amount of R$83.2 million. No reserve has been recognized in connection with this proceeding, as webelieve we can provide the necessary support and that ANEEL can confirm thelegality of the rates.

 

(viii) Civillawsuits:

 

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 calculation ofthe “X” Factor. It is not possible at the present time to estimate the amountsinvolved in these claims. The Company believes that it has a meritoriousdefense and, therefore, no reserve has been recorded for such claims. Anadverse outcome in this matter has been deemed remote.

 

The Company is adefendant in some lawsuits contesting the Emergency Capacity Charge. TheCompany collects the Emergency Capacity Charge from its customers on behalf ofComercializadora Brasileira de Energia Elétrica – CBEE, a federal governmentagency set up to supply energy to utilities in the event of future shortages.It is not possible at the present time to estimate the amounts involved inthese claims. No accrual has been recorded for these claims since the Companybelieves that it has a meritorious defense. An adverse outcome in this matterhas been deemed remote.

 

F-40

----

 

CEMIG is a defendant, together with the city of Belo Horizonte in alawsuit brought by a citizen of Belo Horizonte, challenging the number of hoursthat CEMIG has charged the city of Belo Horizonte for public lighting providedto the city during the past 20 years. CEMIG estimates the contingency to beapproximately R$62. An adverse outcome in this matter has been deemed possible.

 

The Company is a defendant, with CVRD, Comercial e Agrícola Paineirasand Companhia Mineira de Metais, in a class action lawsuit, brought by thecitizens of the State of Minas Gerais. This lawsuit seeks to nullify theenvironmental licenses relating to the Capim Branco I and Capim Branco IIhydroelectric power plants. The Company believes that it has a meritoriousdefense to this lawsuit. An adverse outcome in this matter has been deemedpossible.

 

The Company is also a defendant, together with CVRD, in another classaction lawsuit, brought by the citizens of the State of Minas Gerais. Thislawsuit seeks to nullify the environmental license relating to the Aimoréshydroelectric power plant as well as the related concession. Managementbelieves that it has a meritorious defense to this lawsuit.  An adverse outcome in this matter has beendeemed remote.

 

We have contested a lawsuit brought by Sistron Sistemas e CompanhiaLtda, referring to alleged damages estimated at R$94.7 million arising from aservices agreement that was affected by economic distress caused by the realdevaluation in 1999.  We have not accruedany liability related to this claim, as we believe we have a meritoriousdefense.

 

In addition to the matters described above, CEMIG and its subsidiariesare involved in other litigation arising from the normal course of business.Management believes that any losses would not have a material adverse effect onthe consolidated financial position and results of operations of the Company.

 

**18. SHAREHOLDERS’ EQUITY**

 

(a) Capital stock:

 
| ** **                         | ** ** | **Year ended December 31,  (thousands of shares)** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                                | ** ** | **2003** | ** ** | **2002** | ** ** |
| PREFERRED SHARES:                  |       |                                                    |       |   |   |   |   |
| Balance, at beginning of the year  |       | 91,279,651                                              |       | 91,279,651 |   | 89,504,020 |   |
| Issuance of new shares             |       | —                                                  |       | — |   | 1,775,631 |   |
| Balance, at the end of the year    |       | 91,279,651                                              |       | 91,279,651 |   | 91,279,651 |   |
|                               |       |                                                    |       |   |   |   |   |
| COMMON SHARES:                     |       |                                                    |       |   |   |   |   |
| Balance, at beginning of the year  |       | 70,874,168                                              |       | 70,874,168 |   | 69,495,478 |   |
| Issuance of new shares             |       | —                                                  |       | — |   | 1,378,690 |   |
| Balance, at the end of the year    |       | 70,874,168                                              |       | 70,874,168 |   | 70,874,168 |   |
|                               |       |                                                    |       |   |   |   |   |
| TREASURY STOCK (Preferred shares): |       |                                                    |       |   |   |   |   |
| Balance, at beginning of the year  |       | (69,128                                                 | )          | (69,128 | ) | (67,783 | ) |
| Issuance of new shares             |       | —                                                  |       | — |   | (1,345 | ) |
| Balance, at the end of the year    |       | (69,128                                                 | )          | (69,128 | ) | (69,128 | ) |
| Total                              |       | 162,084,691                                             |       | 162,084,691 |   | 162,084,691 |   |

 

At December 31, 2004, the StateGovernment owned 51% of the Company’s common shares and 3% of its preferredshares, equal to 24% of total capital. The holders of the preferred shares arenot entitled to vote at shareholders’ meetings, but the shares have priority inthe repayment of capital upon liquidation and are entitled to a minimum annualdividend as described in note 18 (d.1).

 

The common and preferred shares have a parvalue amount of R$0.01.

 

(b) Additional paid-in capital:

 

The balance refers to premium received by theCompany when shares were issued.

 

F-41

----

 

(c) Appropriated retained earnings:

 

The following describes certain reserves that are included inshareholders’ equity:

 

Fiscal incentive investment reserve— this reserve results from anoption to designate a portion of income tax otherwise payable for investment ingovernment-approved projects and is recorded in the year following that inwhich the taxable income is earned. Under the financial statements prepared inaccordance with the accounting practices adopted in Brazil, the amountdesignated for investments is recorded as an asset and credited directly tothis reserve. This balance is restricted for capital increase. Under U.S. GAAP,this investment tax credit was originally credited to income and thentransferred from unappropriated retained earnings to this reserve.

 

Rate shortfall reserve— this represents theaccumulated rate shortfall reimbursement recorded under therate-setting system in force up to March 1993. Under the financialstatements prepared in accordance with the accounting practices adopted inBrazil, the amount of rate shortfall, net of taxes, was credited directly tothis reserve, which can be used only for capital increases. Under U.S. GAAP,this amount was originally credited to income, at its net present value, andthen the corresponding amount was transferred from unappropriated retainedearnings to this reserve.

 

Unrealized income reserve— this representsinflationary profits arising from the system of indexation of the financialstatements prepared in accordance with the accounting practices adopted inBrazil in force up to December 31, 1995. Brazilian companies are allowedto record this reserve in order to restrict the amount of net income availablefor compulsory dividends.

 

Legal reserve— this reserve is a requirementfor all Brazilian corporations and represents the appropriationof 5% of annual net income up to a limit of 20% of share capital. Thisappropriation is not required in the fiscal year in which this legal reservebalance, added to the other established capital reserves, exceeds 30% of thepaid-in capital, which has been the case with respect to 2004 and 2003.

 

In its 2002 financial statements prepared inaccordance with accounting practices adopted in Brazil, the Company transferredits total legal reserve and unrealized income reserve to accumulated retainedearnings in order to offset the net loss for the year, which resulted primarilyfrom the recording of the provision for loss on the account receivable from theState Government and the exchange loss caused by the devaluation of the realcompared to the U.S. dollar. Therefore, in its U.S. GAAP financial statements,CEMIG recorded the transfer from its legal reserve and unrealized incomereserve to the unappropriated retained earnings.

 

(d) Unappropriated retained earnings:

 

This balance represents retained earnings determined in accordance withU.S. GAAP after (i) the allocation of the amount for legal reserve (whenrequired) as described in note 18 (c); (ii) allocation or transfer to orfrom other reserves as described in note 18 (c); and (iii) dividends andinterest on capital in lieu of dividends as described in note 18 (d.1).

 

(d.1) Dividends and interest on capital inlieu of dividends:

 

The extraordinary shareholders’ meeting held on December 13, 2004changed the mandatory dividend rate from 25% to 50% of adjusted net incomeunder Brazilian Corporate Law. Additionally, the Company may distributeextraordinary dividends, to the extent that cash is available, as determined bythe Board of Directors, subject to the guidelines of the Company DirectivePlan. Declared dividends are paid in two equal installments, the first on June 30and the second on December 30 of each year.

 

Each preferred share is entitled to an annual dividend equal to thegreater of 10% of par value per preferred share or 3% of the book value of suchpreferred share, also based on the financial statements prepared in accordancewith accounting practices adopted in Brazil. This preferred dividend haspriority over the allocation of the mandatory dividend amount for the relevantperiod.

 

F-42

----

 

After payment of the preferred dividend, the remainder of the mandatorydividend amount, if any, is allocated first to the payment of an annualdividend to the holders of common shares in an amount up to the annual cashdividend guaranteed to the preferred shares. If a portion of the mandatory dividend amount remains after the paymentof the common dividend, the remaining funds are to be distributed on an equal,pro rata basis with respect to all preferred shares and common shares.

 

The Company may also pay interim dividends to holders of preferredshares and common shares.  Any interimdividends paid will count toward the calculation of the dividend payable forthe fiscal year in which the interim dividend was declared.  Under the Brazilian Corporate Law, theCompany’s Board of Directors is permitted to recommend, under certainconditions, the non-payment of the mandatory dividend for any year.

 

The State Government guarantees that the amount of dividends receivedby certain holders of preferred shares and common shares with respect to anyfiscal year will equal at least 6% of the par value of the preferred shares andthe common shares.  Accordingly, even ifnet income, based on the Company’s financial statements prepared in accordancewith accounting practices adopted in Brazil, is none with respect to any fiscalyear, some of CEMIG’s shareholders will receive a dividend of 6%.  This guarantee applies only to privateholders of shares and not to public or governmental holders.

 

Under the Brazilian Corporate Law, if the Company does not distributethe minimum preferred dividends for three consecutive years, the preferredshares become entitled to vote.

 

Effective December 26, 1995, Brazilian law allows thedeductibility of interest on capital paid to shareholders for income taxpurposes, provided such interest is computed based on the Brazilian Long-termInterest Rate (TJLP), effective in the year the interest on capital iscomputed.

 

In 2004, 2003 and 2002, the minimum dividend requirements have been metand dividend distributions have been made on an equal, pro rata basis withrespect to all preferred shares and common shares.

 

The Company declared dividends and intereston capital in lieu of dividends as follows:

 

| ** **          | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dividends           |       | 70                               |       | — |   | 111 |   |
| Interest on capital |       | 510                              |       | 250 |   | 220 |   |
| Total               |       | 580                              |       | 250 |   | 331 |   |

 

Interest on capital related to 2004, in theamount of R$510, will be paid during 2005.

 

The annual shareholders’ meeting held on April 29, 2005 approveddividends to be paid in the amount of R$182.

 

The Company reverts the dividends not claimedby the shareholders within three years of the date they were distributed inaccordance with the Brazilian Corporate Law and its by-laws. The amounts of thedividends not claimed is “de minimis”.

 

F-43

----

 

**19. NET OPERATING REVENUES**

 

(a) The composition ofelectric energy supplied by consumer class is as follows:

 
| ** **                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **GWh (unaudited)**              | ** ** | **R$** | ** ** |
| ** **                      | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Residential                     |       | 6,526                            |       | 6,529 |   | 6,360 |   | 2,650 |   | 2,330 |   | 1,791 |   |
| Industrial                      |       | 22,969                           |       | 21,715 |   | 21,906 |   | 3,557 |   | 2,874 |   | 2,192 |   |
| Commercial                      |       | 3,537                            |       | 3,402 |   | 3,283 |   | 1,259 |   | 1,041 |   | 791 |   |
| Rural                           |       | 1,846                            |       | 1,783 |   | 1,705 |   | 396 |   | 333 |   | 252 |   |
| Governmental entities           |       | 1,532                            |       | 1,506 |   | 1,373 |   | 393 |   | 329 |   | 240 |   |
| Public services                 |       | 966                              |       | 972 |   | 957 |   | 200 |   | 171 |   | 130 |   |
| Own consumption                 |       | 55                               |       | 55 |   | 50 |   | — |   | — |   | — |   |
| Unbilled, net                   |       | —                           |       | — |   | — |   | 106 |   | 101 |   | 62 |   |
|                            |       | 37,431                           |       | 35,962 |   | 35,634 |   | 8,561 |   | 7,179 |   | 5,458 |   |
| Supply                          |       | 364                              |       | 621 |   | 313 |   | 24 |   | 32 |   | 21 |   |
| Energy transactions on CCEE/MAE |       | —                           |       | — |   | — |   | 12 |   | 24 |   | 140 |   |
| Total                           |       | 37,795                           |       | 36,583 |   | 35,947 |   | 8,597 |   | 7,235 |   | 5,619 |   |

 

Low-income consumers

 

The Federal Government, through CentraisElétricas Brasileiras – “ELETROBRAS” is reimbursing distributors for billinglosses incurred from 2002 resulting from the new classification criteriaestablished for low income consumers due to the lower rate applied to them.

 
| ** **            | ** ** | **Number of consumers (unaudited)** | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                  |       |                                |       |   |   |   |   |
| Residential           |       | 4,830,935                           |       | 4,729,674 |   | 4,615,178 |   |
| Industrial            |       | 68,263                              |       | 68,159 |   | 68,211 |   |
| Commercial            |       | 530,158                             |       | 523,055 |   | 515,771 |   |
| Rural                 |       | 388,445                             |       | 368,057 |   | 338,396 |   |
| Governmental entities |       | 48,475                              |       | 46,877 |   | 45,785 |   |
| Public services       |       | 7,305                               |       | 7,069 |   | 6,808 |   |
| Other                 |       | 1,324                               |       | 1,308 |   | 1,339 |   |
|                  |       | 5,874,905                           |       | 5,744,199 |   | 5,591,488 |   |
| Supply                |       | 5                                   |       | 7 |   | 4 |   |
| Total                 |       | 5,874,910                           |       | 5,744,206 |   | 5,591,492 |   |

 

(b) The composition of other operatingrevenues is as follows:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                          |       |                             |       |   |   |   |   |
| Gas sales                     |       | 420                              |       | 367 |   | 200 |   |
| Telecom and cable TV services |       | 62                               |       | 44 |   | 16 |   |
| Services rendered             |       | 21                               |       | 23 |   | 15 |   |
| Rental and leasing            |       | 23                               |       | 22 |   | 20 |   |
| Others                        |       | 10                               |       | 12 |   | 9 |   |
|                          |       | 536                              |       | 468 |   | 260 |   |

 

The results ofGASMIG were consolidated up to December 15, 2004. For more information,see note 10.

 

F-44

----

 

(c) The composition of taxes on revenuesis as follows:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                          |       |                             |       |   |   |   |   |
| VAT                           |       | 1,784                            |       | 1,523 |   | 1,151 |   |
| Emergency capacity charge     |       | 292                              |       | 265 |   | 80 |   |
| COFINS                        |       | 347                              |       | 272 |   | 186 |   |
| PIS-PASEP social contribution |       | 27                               |       | 127 |   | 56 |   |
| Others                        |       | 3                                |       | 3 |   | — |   |
|                          |       | 2,453                            |       | 2,190 |   | 1,473 |   |

 

**20. OPERATING COSTS AND EXPENSES**

 

Some of the operating costs and expenses consist of the following:

 

(a) Electricity purchased for resale:

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                           |       |                             |       |   |   |   |   |
| Itaipu  Binacional             |       | 1,204                            |       | 1,175 |   | 979 |   |
| Initial  contracts             |       | 116                              |       | 151 |   | 148 |   |
| From suppliers though CCEE/MAE |       | 41                               |       | 40 |   | 149 |   |
| System services charge         |       | 92                               |       | — |   | — |   |
| From other                     |       | 24                               |       | 30 |   | 57 |   |
|                           |       | 1,477                            |       | 1,396 |   | 1,333 |   |

 

The rate for electricity purchased fromItaipu is denominated in US dollars, as defined by ANEEL. ANEEL increased therate of the electricity purchased from Itaipu by 7.62% from US$17.8474 toUS$19.2071 per kW, effective January 1, 2005.

 

(b) Personnel:

 
| ** **                                               | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                     |       |                             |       |   |   |   |   |
| Salary and payroll charges                               |       | 802                              |       | 657 |   | 572 |   |
| Benefits                                                 |       | 80                               |       | 71 |   | 59 |   |
|                                                     |       | 882                              |       | 728 |   | 631 |   |
| Personnel costs transferred to construction  in progress |       | (121                             | )          | (96 | ) | (101 | ) |
|                                                     |       | 761                              |       | 632 |   | 530 |   |
| Voluntary termination program                            |       | 27                               |       | 78 |   | 2 |   |
|                                                     |       | 788                              |       | 710 |   | 532 |   |

 

Voluntary termination program - PDI

 

The Company’s Voluntary termination programimplemented by CEMIG in December 2003 and May 2004 was accepted by987 employees.

 

F-45

----

 

The financial incentive to accept the programwas a lump sum payment from 0 to 17 times the employees’ monthly salaries,according to specific established criteria, mainly the contribution time forthe federal social security program (“INSS”). According to the definedcriteria, the highest incentive, equal to 17 monthly salaries, was granted tomale and female employees who contributed to the INSS during 30 and 25 years,respectively, gradually decreasing for employees whose contribution time ishigher or lower.

 

Additionally, CEMIG guarantees a full 6-monthpayment of the employee life insurance and health plan costs, starting on thetermination date.

 

The PDI costs of R$105 were recorded in theStatement of Income in 2004 and 2003 in the amounts of R$27 and R$78,respectively.

 

The employees’ terminations started on January 15,2004 and were concluded on January 4, 2005

 

Employee Profit Sharing

 

The Company used as general criteria for thepayment of the employees’ participation in the results of the fiscal years2004, 2003 and 2002 a percentage of 3% of the service income. Additionally, inthe collective labor agreement reached with the unions in November 2004and 2003, the Company agreed to pay an additional installments of R$48 andR$41, respectively.

 

(c) Regulatory charges:

 
| ** **                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                               |       |                             |       |   |   |   |   |
| Fuel usage  quota                  |       | 292                              |       | 282 |   | 345 |   |
| Global reserve for reversion quota |       | 204                              |       | 156 |   | 144 |   |
| Energy development account         |       | 238                              |       | 118 |   | — |   |
| ANEEL inspection fee               |       | 19                               |       | 15 |   | 12 |   |
| Charges for use of water resources |       | 108                              |       | 14 |   | 47 |   |
|                               |       | 861                              |       | 585 |   | 548 |   |

 

(d) Other:

 
| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                       |       |                             |       |   |   |   |   |
| Employees profit sharing                   |       | 110                              |       | 93 |   | 38 |   |
| Provision for doubtful accounts            |       | 62                               |       | 57 |   | 13 |   |
| Disposal of fixed assets, net              |       | 28                               |       | 53 |   | 42 |   |
| Provisions for contingencies-              |       |                             |       |   |   |   |   |
| Labor claims                               |       | 20                               |       | 21 |   | 16 |   |
| Civil lawsuits – Consumers            |       | 8                                |       | 11 |   | 12 |   |
| ANEEL administrative proceedings           |       | (10                              | )          | 15 |   | — |   |
| Civil lawsuits – Other                |       | (8                               | )          | 18 |   | 4 |   |
| Bonus paid during the rationing period     |       | 24                               |       | — |   | — |   |
| Rentals                                    |       | 34                               |       | 25 |   | 15 |   |
| Grants and donations                       |       | 19                               |       | 17 |   | 14 |   |
| Consumption – electric energy         |       | 20                               |       | 17 |   | 12 |   |
| Technological and scientific national fund |       | 20                               |       | 16 |   | 12 |   |
| Advertising                                |       | 20                               |       | 11 |   | 19 |   |
| CCEE/MAE contribution                      |       | 2                                |       | 3 |   | 6 |   |
| Labor indemnity                            |       | 2                                |       | — |   | 4 |   |
| General expenses                           |       | 50                               |       | 47 |   | 27 |   |
| Other taxes (real estate, vehicle, etc)    |       | 6                                |       | 18 |   | 4 |   |
|                                       |       | 407                              |       | 422 |   | 238 |   |

 

F-46

----

 

As a result of a judicial dispute during theElectricity Rationing Plan, CEMIG was not able to charge part of the surchargesdue by some consumers, in the amount of R$24. As a result, ANEEL has notreimbursed the Company for the bonuses equivalent to the unbilled surcharge.This issue is under negotiation with the Ministry of Mines and Energy, sincethe Company was only an agent for the policy determined by the Energy CrisisCommittee regarding the bonus and surcharge polices. The Company recorded afull reserve for this issue due to the uncertainty regarding its collection.

 

**21. FINANCIAL INCOME (EXPENSES), NET**

 

Financial income (expense) consists of the following:

 
| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Financial income-                                                              |       |                             |       |   |   |   |   |
| Interest and monetary restatement of account  receivable from State Government |       | 255                              |       | 164 |   | 303 |   |
| Investment income earned                                                       |       | 137                              |       | 78 |   | 236 |   |
| Late charges on overdue electricity bills,  recorded on the cash basis         |       | 63                               |       | 56 |   | 43 |   |
| Foreign exchange gains                                                         |       | 110                              |       | 352 |   | 31 |   |
| Reclassification adjustment on marketable  securities gains                    |       | —                           |       | 76 |   | — |   |
| Monetary restatement on deferred regulatory  assets                            |       | 573                              |       | 450 |   | 120 |   |
| Gains on financial instruments                                                 |       | 2                                |       | 10 |   | — |   |
| Taxes on financial revenues                                                    |       | (57                              | )          | (78 | ) | (45 | ) |
| Other                                                                          |       | 32                               |       | 49 |   | 51 |   |
|                                                                           |       | 1,115                            |       | 1,157 |   | 739 |   |
| Financial expense-                                                             |       |                             |       |   |   |   |   |
| Interest on loans and financing                                                |       | (255                             | )          | (221 | ) | (300 | ) |
| Monetary restatement on deferred regulatory  liabilities                       |       | (80                              | )          | (77 | ) | — |   |
| Financial transaction tax (CPMF)                                               |       | (49                              | )          | (39 | ) | (28 | ) |
| Foreign exchange losses                                                        |       | (25                              | )          | (16 | ) | (816 | ) |
| Monetary restatement losses                                                    |       | (124                             | )          | (53 | ) | (101 | ) |
| Losses on financial instruments                                                |       | (176                             | )          | (54 | ) | — |   |
| Other expenses                                                                 |       | (56                              | )          | (23 | ) | (19 | ) |
|                                                                           |       | (765                             | )          | (483 | ) | (1,264 | ) |
| Financial income (expenses), net                                               |       | 350                              |       | 674 |   | (525 | ) |

 

The foreign exchange gains and losses are substantially related to thevariation of the *real* in relationto the U.S. dollar.

 

**22. RELATED PARTY TRANSACTIONS**

 

The Company enters into a variety of related party transactions, themain transactions are as follows:

 

(a) State Government -
|   | Account receivable and related financial  income | Note 3 and 21 |
|--------|--------------------------------------------------|---------------|
|   | Accounts receivable, net                         | Note 8        |
|   | VAT - Assets                                     | Note 9        |
|   | VAT - Liabilities                                | Note 13       |
|   | VAT - Expense                                    | Note 19       |
|   | Debentures Liabilities                           | Note 14       |

(b) FORLUZ -
|   | Employee post-retirement benefits related  balances | Note 16 |
|--------|-----------------------------------------------------|---------|

 

Other related party transactions are notmaterial.

 

F-47

----

 

**23. 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 subject CEMIG toconcentrations of credit risk are cash and cash equivalents and restrictedinvestments. CEMIG limits its credit risk associated with cash and cashequivalents and restricted investments by placing its investments with highlyrated financial institutions generally in short-term securities.

 

(a) Cashand cash equivalents and restricted investments:

 

As of December 31, 2004 and 2003, cashand cash equivalents and restricted investments are stated at cost plus accruedinterest and approximate fair value, given the short term maturities of theseitems.

 

As of December 31, 2004 and 2003, the Company has restrictedinvestments in the amount of R$20 and R$132, respectively, which have interestcalculated based on the CDI variation for 2004 and CDI variation and U.S.dollar variation for 2003.

 

(b) Financing:

 

Based on interest rates currently availableto CEMIG for bank financings with similar terms and average maturities, thefair value of long-term financing at December 31, 2004 and 2003 is R$1,786and R$2,281, respectively.

 

(c) Derivativefinancial instruments:

 

The Company utilizes derivative financial instruments to protect itsoperations from exchange rate risk. The derivative financial instruments arenot used for speculative purposes. CEMIG’s subsidiaries have no derivativefinancial instruments.

 

As of December 31, 2004, 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 notional amount of US$88 million and the Japanese yenin the notional amount of ¥6,937 million.

 

As of December 31, 2003, the Company has swaps with financialinstitutions, in connection with potential exchange losses resulting from thedevaluation of the Brazilian real compared to the U.S. dollar in the notionalamount of US$139 million and the Japanese yen in the notional amount of ¥6,739million.

 

The net realized and unrealized losses from these operations for 2004,in the amounts of R$105 and R$69, respectively, were recorded in financialexpenses.

 

The net realized and unrealized losses from these operations for 2003,in the amounts of R$30 and R$14, respectively, were recorded in financialexpenses.

 

F-48

----

 

The table below summarizes the Company’s derivative financialinstruments and the unrealized losses recorded on these instruments as of December 31,2004:

 
| ** **                                                               | ** ** | ** **                                                                             | ** ** | ** **                     | ** ** | ** **                       | ** **      | **As of December  31, 2004** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|-----------------|------------------------------|------------|
| ** **                                                               | ** ** | ** **                                                                             | ** ** | ** **                     | ** ** | **Notional  amount  (millions)** | ** **      | **Unrealized  losses**       | ** ** |
| **CEMIG’s  rights**                                                 | ** ** | **CEMIG’s  obligations**                                                          | ** ** | **Maturity**                   | ** ** | ** **                       | **Fair  Value** | ** **                   |
|                                                                     |       |                                                                                   |       |                           |       |                             |            |                         |       |
| YEN  - Japanese Plus interest rate ranging from 1.31% to 3.90% per annum |       | R$  Linked to CDI (107.90% to 111.00%)                                                 |       | Ranging  from04/2005to 12/2009 |       | ¥                           | 6,937           |                         | (15        | ) |
|                                                                     |       |                                                                                   |       |                           |       |                             |            |                         |       |   |
| U.S.  dollar Plus interest rate ranging from 5.58% to 7.48% per annum    |       | R$  Linked to CDI (100%) Plus interest rate ranging from 2.12% to 3.01% per annum |       | Ranging  from04/2005to 11/2009 |       | US$                              | 111             |                         | (16        | ) |
|                                                                     |       |                                                                                   |       |                           |       |                             |            |                         |       |   |
| R$  Linked to 100% CDI                                                   |       | R$ or  US$  Linked to CDI (60%) or the greater of the exchange variation          |       | Ranging  from10/2006to 11/2006 |       | US$                              | 23              |                         | (18        | ) |
|                                                                     |       |                                                                                   |       |                           |       |                             |            |                         |       |   |
| U.S.  dollar Plus interest rate ranging from 3.30% to 4.10% per annum    |       | R$ or  US$  Linked to CDI (95%) or the greater of the exchange variation          |       | Ranging  from05/2005to 06/2005 |       | US$                              | 31              |                         | (20        | ) |
|                                                                     |       |                                                                                   |       |                           |       |                             |            | (69                          | )          |

 

At December 31, 2004, the Company hadrecorded the amount of R$69 as other current liabilities, representing the fairvalue of these financial instruments at the respective balance sheet date.

 

(d) Otherfinancial instruments:

 

The carrying value of CEMIG’s other financialinstruments, in *reais*, approximatesfair values at such dates reflecting the short-term maturity or frequentrepricing at December 31, 2004 and 2003 of these instruments.

 

**24. EXPOSURE AND RISK MANAGEMENT**

 

As a Brazilian energy concessionaire, the Company operates in anenvironment in which factors such as corporate reorganization, new regulationsissued by governmental bodies and consumer market changes are considered riskfactors.

 

The Company established of a Corporate Risk Management Program in January 2003,and implemented this program in 2004 in connection with its restructuring. ThisCorporate Risk Management Program aims to achieve the following: operate as anauxiliary in achievement of the objectives set by the strategic plan; createawareness among shareholders of the possible events that could constitute arisk of loss of value; structure the company to be able to take proactivestances in relation to its risk environment; provide the company’s executiveswith a methodology and tools for effective management of risk; and provide otherareas of strategic management with input concepts and procedures, and factorsthat strengthen the company’s organizational control infrastructure.

 

F-49

----

 

The main market risks which affect CEMIG’s operations are described asfollows:

 

(a) Exchange rate risk

 

CEMIG and its subsidiaries are exposed to the risk of increases inexchange rates, mainly U.S. dollar against the real, significantly impactingits financial position, results of operations, and cash flows. In order toprotect against increases in exchange rates, the Company has derivativefinancial instruments (“swaps”) with financial institutions in the amount ofR$234, equivalent to the notional amount of US$88 million and R$180, equivalentto the notional amount of ¥6,937 million. These financial instruments offsetthe exchange variation of the Brazilian real compared to the U.S. dollar andyen for interest based on the CDI (See Note 23 c). The exchange rate netexposure is as follows:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **U.S. Dollar**                                |       |                  |       |   |   |
| Financing                                      |       | 857                   |       | 1,424 |   |
| (-) Contracted derivative instruments          |       | (234                  | )          | (401 | ) |
| (-) Restricted investments                     |       | —                |       | (41 | ) |
|                                           |       | 623                   |       | 982 |   |
| **Japanese Yen**                               |       |                  |       |   |   |
| Financing                                      |       | 182                   |       | 182 |   |
| (-) Contracted derivative instruments          |       | (180                  | )          | (182 | ) |
|                                           |       | 2                     |       | — |   |
| **Other Currencies**                           |       |                  |       |   |   |
| Financing                                      |       | 80                    |       | 106 |   |
| Net liabilities exposed to exchange rate  risk |       | 705                   |       | 1,088 |   |

 

 

Starting in 2001, the exchange rate variation related to energyacquisition from Itaipu Binacional is being offset in subsequent rateadjustments, considering the implementation the Parcel A tracking mechanism.Due to that, these purchases no longer represent an exchange rate risk.

 

(b) International interest rate risk

 

CEMIG and certain subsidiaries are exposed to the risk of increases ininternational interest rates, impacting their loans and financing denominatedin foreign currencies with floating rates, mainly LIBOR, in the amount of R$322(R$702 as of December 31, 2003).

 

(c) Credit risk

 

The risk resulting from losses on doubtful receivables for CEMIG isconsidered low. A significant part of electricity sales is dispersed among alarge number of customers. The Company’s procedures to reduce overdue billscomprise the issuance of notices that bills are overdue, phone calls andnegotiations to permit the collectibility of bills that are in arrears. Afterthese efforts are exhausted, CEMIG interrupts the energy supply.

 

(d) Energy rationing risk

 

A substantial portion of the energy sold by CEMIG is generated by itsown power plants. The remaining portion is acquired from Itaipu through initialcontracts signed with ELETROBRAS, and a smaller part from other generators andthrough the –MAE/CCEE. A long period without rainfall that would reduce thereservoir levels used to feed hydroelectric generation facilities would createlosses for CEMIG, due to an eventual increase in the purchased energy rate andthe adoption of a new Electricity Rationing Plan. Considering the currenthydroelectric reservoir levels of the Brazilian electric system, the FederalGovernment does not expect a new Electricity Rationing Plan in the foreseeablefuture.

 

F-50

----

 

(e) Debt acceleration risk

 

The Company and certain of its subsidiaries have contracts for loans,financing and debentures with certain restrictive clauses (covenants), usuallyapplicable to such operations, related to compliance with economic-financialindices, cash flow generation and other indicators. The creditors have theright to declare the early termination of CEMIG’s obligations and require theimmediate payment of all outstanding debts in the case of a violation of suchrestrictive clauses.  Such clauses werecomplied with, except for the MBK Furukawa Sistemas S.A. / UNIBANCO loan toEmpresa de Infovias S.A., for which a waiver has been granted by the creditorsup to December 31, 2005. (See Note 14)

 

**25. SHAREHOLDERS’ AGREEMENT**

 

In 1997, the State of Minas Gerais sold approximately 33% of theCompany’s common shares to a group of investors led by *Southern Electric Brasil Participações Ltda.*(“Southern”). As part of this sale, the State of Minas Gerais and Southernentered into a shareholders’ agreement that provided for, among other matters,special quorum requirements to approve significant corporate actions, certainamendments to CEMIG’s by-laws, the issuance of convertible debentures andwarrants, changes to the Company’s corporate structure and any distribution ofdividends other than that required by the by-laws. This agreement grantedSouthern a veto right over certain important corporate decisions.

 

On September 13, 1999, the State of Minas Gerais filed a lawsuitto nullify this shareholders’ agreement on the grounds that it violated thestate and federal constitutions because the special quorum provisions wouldconstitute an unlawful transfer of the control of CEMIG to Southern.

 

On September 27, 1999, the Minas Gerais State Court of Appealsgranted an injunction suspending the effects of the special quorum provisions,pending the outcome of the lawsuit.

 

In March 2000, the lower court rendered a decision declaring theshareholders’ agreement null and void.

 

On August 7,2001, the Minas Gerais State Court of Appeals upheld the March 2000 lowercourt ruling declaring the shareholders’ agreement null and void.

 

This decisionwas appealed to the Superior Tribunal de Justiça (Superior Court ofJustice).  A final decision confirmingthe Minas Gerais State Court of Appeals was ruled on in December 2003.  The decision of the Superior Tribunal deJustiça is subject to a request for amendment and therefore the effectivenessof the shareholders’ agreement and control of CEMIG remain subject to furtherjudicial challenge.

 

**26. CONCENTRATIONS**

 

(a) Labor:

 

The majority of CEMIG’s work force belongs to SINDIELETRO (employeelabor union). CEMIG and SINDIELETRO negotiate a collective bargaining agreementon an annual basis, which includes wage increases and profit sharing, alongwith other matters. The collective bargaining agreement becomes effective in November ofeach year. The 2004 collective bargaining agreement included an 7.0% averagesalary increase.

 

(b) Renewal of concession agreements:

 

In accordance with the Concessions Law, as modified by the New IndustryModel Law, upon application by the concessionaire, existing concessions may berenewed by the Federal Government for additional periods of up to 20 yearswithout being subject to the bidding process, provided that the concessionairehas met minimum performance standards and that the proposal is otherwiseacceptable to the Federal Government. Although the Company believes that itsconcessions will be renewed on consistent terms with those in effect at December 31,2004, the renewal process is subject to the Federal Government’s discretion andthere is a lack of precedent with respect to the Federal Government’s exerciseof such discretion and interpretation and application of the Concessions Law.

 

F-51

----

 

In September 2004, CEMIG requested a 20-year extension ofthe concessions of the following plants: UHE Emborcação, UHE Nova Ponte, PCHSão Bernardo, PCH Poço Fundo, PCH Santa Luzia, PCH Luiz Dias and PCH Xicão.ANEEL and the Ministry of Mines and Energy have not responded to CEMIG’srequest.

 

Seven of the Company’s hydroelectric plants accounted for approximately87% of its installed electric generation capacity as of December 31, 2004.

 

 
| **GENERATION CONCESSIONS-** | ** ** | **Installed   Capacity  (MW)** | ** ** | **Date concession  expires**         | ** ** |
|-----------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **(unaudited)**                | ** ** | ** **                           | ** ** |
| São Simão         |       | 1,710                          |       | January 2015                    |       |
| Emborcação        |       | 1,192                          |       | July 2005                       |       |
| Nova Ponte                  |       | 510                            |       | July 2005                       |       |
| Jaguara                     |       | 424                            |       | August 2013                     |       |
| Miranda                     |       | 408                            |       | December 2016                   |       |
| Três Marias            |       | 396                            |       | July 2015                       |       |
| Volta Grande                |       | 380                            |       | February 2017                   |       |
| Others                      |       | 929                            |       | August 2004 to August 2036 |       |
| Total installed capacity    |       | 5,949                          |       |                                 |       |

 
| **DISTRIBUTION CONCESSIONS-** | ** ** | **Date concession  expires** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| Northern Region               |       | 02/2016                      |       |
| Southern Regional             |       | 02/2016                      |       |
| Eastern Region                |       | 02/2016                      |       |
| Western Region                |       | 02/2016                      |       |

 

The Company expects its concessions will be renewed, and thus lossesare not expected due to the non-renewal of the current concessions.

 

**27. INSURANCE**

 

The Company has insurance policies for part of its property, plant andequipment, as follows:

 
| **Risk**                           | ** ** | **Coverage** | ** ** | **Effective  Date**      | ** ** | **Insured  Amount** | ** ** |
|------------------------------------|------------|--------------|------------|--------------------------|------------|---------------------|------------|
| Aircraft                           |       | Total        |       | 02/28/05 to 02/28/06     |       | 18                  |       |
| Warehouses and buildings           |       | Fire         |       | 07/10/04 to 07/10/05     |       | 418                 |       |
| Generators, turbines and equipment |       | Total        |       | 02/04/2005 to 02/04/2006 |       | 1,333               |       |

 

CEMIG does not have general third-party liability insurance covering accidentsand has not requested bids relating to this type of insurance. The Company hasnot requested 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 not experienced significant losses arising from theaforementioned risks.

 

F-52

----

 

**28. COMMITMENTS**

 

Cemig has outstanding contractual obligations and commitments whichinclude principal debt payment provisions, the obligation to purchaseelectricity for resale from Itaipu, the obligation to transfer and transportelectric power from Itaipu as well as construction commitments.  The following table provides information, asof December 31, 2004, about our contractual obligations and commitments.

 
| ** **                                               | ** ** | **Total** | ** ** | **Less  than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More  than 5  years** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|------------------------|------------|---------------|------------|---------------|------------|-------------------------|------------|
| Long-term debt                                           |       | 4,238     |       | 1,417                  |       | 1,322         |       | 873           |       | 626                     |       |
| Purchase obligations                                     |       |      |       |                   |       |          |       |          |       |                    |       |
| Purchase of electricity from Itaipu for  resale (1) |       | 8,619     |       | 1,024                  |       | 2,048         |       | 2,048         |       | 3,499                   |       |
| Energy auction on CCEE                                   |       | 6,478     |       | 267                    |       | 1,618         |       | 1,621         |       | 2,972                   |       |
| Transfer and transport electric power from  Itaipu (1)   |       | 505       |       | 60                     |       | 120           |       | 120           |       | 205                     |       |
| Investments                                              |       |      |       |                   |       |          |       |          |       |                    |       |
| Aimorés hydroelectric power plant (2)               |       | 66        |       | 66                     |       | —        |       | —        |       | —                  |       |
| Irapé hydroelectric power plant (2)                 |       | 287       |       | 271                    |       | 16            |       | —        |       | —                  |       |
| Funil hydroelectric power plant (2)                      |       | 11        |       | 11                     |       | —        |       | —        |       | —                  |       |
| Queimado hydroelectric power plant (2)                   |       | 20        |       | 20                     |       | —        |       | —        |       | —                  |       |
| Pai Joaquim hydroelectric power plant (2)                |       | 10        |       | 10                     |       | —        |       | —        |       | —                  |       |
| Cemig Capim  Branco Energia(2)                           |       | 39        |       | 22                     |       | 17            |       | —        |       | —                  |       |
| Transmission lines                                       |       | 46        |       | 35                     |       | 11            |       | —        |       | —                  |       |
| GASMIG                                                   |       | 75        |       | 5                      |       | 64            |       | 6             |       | —                  |       |
| Empresa de  Infovias S.A.                                |       | 48        |       | 48                     |       | —        |       | —        |       | —                  |       |
| Other long-term obligations                              |       |      |       |                   |       |          |       |          |       |                    |       |
| Pension plan contributions                               |       | 1,555     |       | 112                    |       | 237           |       | 186           |       | 1,020                   |       |
| Total                                                    |       | 21,997    |       | 3,368                  |       | 5,453         |       | 4,854         |       | 8,322                   |       |

 

----

(1) Contract with Furnas, denominated inU.S. dollars, to supply electric power purchased from Itaipu until May 2013.

 

(2) Contractual obligations withcontractors.

 

**29. SEGMENTINFORMATION**

 

CEMIG has three reportablesegments: the electric energy segment, the gas segment and thetelecommunications segment.

 

The electric energy segment engages primarily in the generation,transmission, distribution and sale of electric energy.

 

The gas segment principal activities are the acquisition,transportation and distribution of natural gas.

 

The telecommunications segment principal activities are renderingtelecommunications services and developing related activities throughintegrated systems using optical fiber cable, coaxial cable, electronicequipment and other, as well as providing cable TV and internet accessservices.

 

F-53

----

 

The operations of all reportable segments of the Company are conductedsubstantially in the State of Minas Gerais, Brazil. Reportable segments arestrategic business units that offer different products and services. Each ofthe reportable segments has a responsible senior officer. All inter-segmentactivity has been eliminated with respect to revenue and gross margin.Financial information for each of the Company’s reportable segments is asfollows:

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Identifiable  assets       |       |     |       |     |       |
| Electricity                |       | 18,919   |       | 16,652   |       |
| Gas                        |       | —   |       | 145      |       |
| Telecommunications         |       | 346      |       | 355      |       |
| Eliminations               |       | (13      | )          | (33      | )          |
| Total  consolidated assets |       | 19,252   |       | 17,119   |       |

 
| ** **                                                 | ** ** | **2004**        | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                 | ** ** | **Electricity** | ** ** | **Gas** | ** ** | **Telecommunications** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  revenues from external customers                      |       | 7,267           |       | 335 |   | 52 |   | — |   | 7,654 |   |
| Intersegment  sales                                        |       | —          |       | — |   | 9 |   | (9 | ) | — |   |
| Net  revenues                                              |       | 7,267           |       | 335 |   | 61 |   | (9 | ) | 7,654 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Operating  income (loss) before financial income (expense) |       | 2,085           |       | 46 |   | (13 | ) | — |   | 2,118 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Financial  income, net                                     |       | 348             |       | 7 |   | (5 | ) | — |   | 350 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Income  tax expense                                        |       | (712            | )          | (18 | ) | (1 | ) | — |   | (731 | ) |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Minoritary  interests                                      |       | —          |       | — |   | 2 |   | — |   | 2 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                         |       | 1,721           |       | 35 |   | (17 | ) | — |   | 1,739 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Depreciation  and amortization charges                     |       | 644             |       | 4 |   | 29 |   | — |   | 677 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Additions  to property, plant and equipment                |       | 1,045           |       | — |   | 16 |   | — |   | 1,061 |   |

 

F-54

----

 
| ** **                                                 | ** ** | **2003**        | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                 | ** ** | **Electricity** | ** ** | **Gas** | ** ** | **Telecommunications** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  revenues from external customers                      |       | 5,621           |       | 367 |   | 44 |   | — |   | 6,032 |   |
| Intersegment  sales                                        |       | —          |       | — |   | 8 |   | (8 | ) | — |   |
| Net  revenues                                              |       | 5,621           |       | 367 |   | 52 |   | (8 | ) | 6,032 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Operating  income (loss) before financial income (expense) |       | 1,318           |       | 45 |   | (34 | ) | — |   | 1,329 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Financial  income, net                                     |       | 657             |       | 9 |   | 8 |   | — |   | 674 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Income  tax expense                                        |       | (589            | )          | (14 | ) | (4 | ) | — |   | (607 | ) |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                         |       | 1,386           |       | 37 |   | (27 | ) | — |   | 1,396 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Depreciation  and amortization charges                     |       | 652             |       | 4 |   | 30 |   | — |   | 686 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Additions  to property, plant and equipment                |       | 987             |       | 20 |   | 22 |   | — |   | 1,029 |   |

 
| ** **                                                 | ** ** | **2002**        | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                 | ** ** | **Electricity** | ** ** | **Gas** | ** ** | **Telecommunications** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  revenues from external customers                      |       | 4,665           |       | 194 |   | 13 |   | — |   | 4,872 |   |
| Intersegment  sales                                        |       | —          |       | — |   | 4 |   | (4 | ) | — |   |
| Net  revenues                                              |       | 4,665           |       | 194 |   | 17 |   | (4 | ) | 4,872 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Operating  income (loss) before financial income (expense) |       | 536             |       | 31 |   | (40 | ) | — |   | 527 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Financial  income (expense), net                           |       | (480            | )          | 5 |   | (50 | ) | — |   | (525 | ) |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Income  tax benefit (expense)                              |       | (32             | )          | (10 | ) | 16 |   | — |   | (26 | ) |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                         |       | 37              |       | 25 |   | (74 | ) | — |   | (12 | ) |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Depreciation  and amortization charges                     |       | 646             |       | 3 |   | 17 |   | — |   | 666 |   |
|                                                       |       |            |       |   |   |   |   |   |   |   |   |
| Additions  to property, plant and equipment                |       | 761             |       | 19 |   | 89 |   | — |   | 869 |   |

 

Under CEMIG’s distribution concession agreements, signed in 1997, CEMIGwas required to restructure its operations in order to place its generation,transmission and distribution operations into separate subsidiaries, whollyowned by CEMIG. To comply with this requirement, in 2004, CEMIG incorporatedtwo new wholly-owned subsidiaries: CEMIG Geração e Transmissão S.A. and CEMIGDistribuição S.A.. The Company’s Extraordinary Stockholders’ General Meeting onDecember 30, 2004 authorized the transfer, as of January 1, 2005, ofthe Company’s investments and separate assets and liabilities to thesesubsidiaries to separate its generation, transmission and distributionactivities. CEMIG Geração e Transmissão S.A. and CEMIG Distribuição S.A. beganto operate as from January 1, 2005. The effective transfer of concessions of electricity transmission,generation and distribution to the new subsidiaries was

 

F-55

----

 

subject to ANEEL’s approval, inaccordance with Resolution N.o 407, of December 20, 2004. Thisrestructuring had no effect on the consolidated financial statements of theCompany. As a result of this restructing the Company’s Electricity reportablesegment will be divided into Generation/Transmission and Distribution for 2005.

 

**30. SUBSEQUENT EVENTS**

 

ANEEL issued Resolution No. 87 on April 6, 2005, whichestablished our average annual rate adjustment of 23.88% to be effective beginningon April 8, 2005. The components of this increase are (i) 6.68% dueto the Rate Adjustment Index; (ii) 5.72% due to deferred regulatory asset;(iii) 7.35% due to intra-annual variation of fixed costs, or CVA; (iv) 2.46%due to increases in the PASEP and COFINS taxes and (v) 1.67% due torevenue the Company did not achieve in 2004 as a result of the re-issuing ofResolution No. 83 on May 24, 2004, which reduced the Company’s rates.

 

**31 - RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS**

 

In July 2003, the Emerging Issues Task Force stated in EITF Issue No. 03-11,or EITF 03-11, that the determination as to whether realized gains andlosses on derivative contracts not held for trading purposes should be reportedon a net or gross basis is a matter of judgment that depends on the relevantfacts and circumstances and the economic substance of the transaction.  In analyzing the facts and circumstances,EITF Issue No. 99-19 and Opinion No. 29, “Accounting forNon-monetary Transactions,” should be considered.  EITF 03-11 is effective fortransactions or arrangements entered into after September 30, 2003.  The adoption of EITF 03-11 did not havea material effect on the Company’s financial statements.

 

 In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 153, “Exchanges of Non-monetary Assets - anamendment of APB Opinion No. 29” (“SFAS 153”), which amends AccountingPrinciples Board Opinion No. 29, “Accounting for Non-monetary Transactions”to eliminate the exception for non-monetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of non-monetaryassets that do not have commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company will apply SFAS 153 in the event that exchanges ofnon-monetary assets occur in fiscal periods beginning after June 15, 2005.

 

 

**********************

 

F-56

----

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 1                   |       | Corporate by-laws of CEMIG, as amended and in effect since  December 13, 2004.                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 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)).                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 3                   |       | Agreement, dated June 17, 2002, between Empresa de Infovias S.A.  and CLIC, relating to the shares of WAY TV (incorporated by reference to  Exhibit 3 to our Annual Report on Form 20-F filed on March 26, 2003 (File  No. 1-15224)).                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 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                 |       | 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)). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4                 |       | 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)).                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.5                 |       | 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)).                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.6                 |       | 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)).                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7                 |       | 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)).                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.8                 |       | 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                                                                                                                                                                             |

 

----

 
| **Exhibit  Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                         |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                 |
|                |       | 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)).                                                               |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 4.9                 |       | 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)). |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 4.10                |       | Summary of Indenture Covering the Third Public Issuance of Common  Debentures, dated June 14, 2004, between CEMIG and Pavarini  Distribuidora de Títulos e Valores Mobilários.                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 8                   |       | List of Subsidiaries                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 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 May 25, 2005.                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 12.2                |       | Chief Financial and Investor Relations Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 25,  2005.                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 13.1                |       | Chief Executive Officer Certification pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, dated May 25, 2005.                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                 |
| 13.2                |       | Chief Financial and Investor Relations Officer Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 25,  2005.                                                                                                                                              |

 

----