Table ofContents

 

**UNITEDSTATES**

**SECURITIESAND 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**     |
| ** ** | ** **                                                                                                                                       |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2009** |
| ** ** | ** **                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                       |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                          |
| ** ** | ** **                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                       |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                       |

 

Dateof event requiring this shell company report: N/A

 

Commissionfile number 1-15224

 

----

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

 

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

 

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

 

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

 

None

 

----

Table ofContents

 

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

 

None

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:
|   | 298,269,668 Common Shares    |
|--------|------------------------------|
|   | 384,144,914 Preferred Shares |

 

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

x Yes   o No

 

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

o Yes   x No

 

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

x Yes   o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

o Yes   o No

 

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

 

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

 

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

 

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

 

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

o Item 17   x Item 18

 

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

o Yes   x No

 

----

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

 

----

Table ofContents

 

**Table of Contents**

 
| PART I   |                                                                          | 1      |
|---------------|-------------------------------------------------------------------------------|--------|
|          |                                                                          |   |
| Item 1.       | Identity of  Directors, Senior Management and Advisers                        | 1      |
|          |                                                                          |   |
| Item 2.       | Offer  Statistics and Expected Timetable                                      | 1      |
|          |                                                                          |   |
| Item  3.      | Key  Information                                                              | 1      |
|          |                                                                          |   |
| Item 4.       | Information on  the Company                                                   | 15     |
|          |                                                                          |   |
| Item 4A.      | Unresolved Staff Comments                                                     | 66     |
|          |                                                                          |   |
| Item 5.       | Operating  and Financial Review and Prospects                                 | 66     |
|          |                                                                          |   |
| Item 6.       | Directors,  Senior Management and Employees                                   | 84     |
|          |                                                                          |   |
| Item 7.       | Major  Shareholders and Related Party  Transactions                           | 93     |
|          |                                                                          |   |
| Item 8.       | Financial Information                                                         | 95     |
|          |                                                                          |   |
| Item  9.      | The  Offer and Listing                                                        | 101    |
|          |                                                                          |   |
| Item 10.      | Additional  Information                                                       | 104    |
|          |                                                                          |   |
| Item 11.      | Quantitative  and Qualitative Disclosures about Market Risk                   | 118    |
|          |                                                                          |   |
| Item 12.      | Description  of Securities Other than Equity Securities                       | 120    |
|          |                                                                          |   |
| PART II  |                                                                          | 121    |
|          |                                                                          |   |
| Item 13.      | Defaults,  Dividend Arrearages and Delinquencies                              | 121    |
|          |                                                                          |   |
| Item 14.      | Material  Modifications to the Rights of Security Holders and Use of Proceeds | 121    |
|          |                                                                          |   |
| Item 15.      | Controls and  Procedures                                                      | 121    |
|          |                                                                          |   |
| Item 16A.     | Audit Committee Financial  Expert                                             | 123    |
|          |                                                                          |   |
| Item  16B.    | Code  of Ethics                                                               | 123    |
|          |                                                                          |   |
| Item 16C.     | Principal  Accountant Fees and Services                                       | 123    |
|          |                                                                          |   |
| Item 16D.     | Exemptions  from the Listing Standards for Audit Committees                   | 124    |
|          |                                                                          |   |
| Item 16E.     | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers       | 124    |
|          |                                                                          |   |
| Item 16F.     | Changes in  Registrant’s Certifying Accountant                           | 124    |
|          |                                                                          |   |
| Item 16G      | Corporate  Governance                                                         | 124    |
|          |                                                                          |   |
| PART III |                                                                          | 126    |
|          |                                                                          |   |
| Item 17.      | Financial  Statements                                                         | 126    |
|          |                                                                          |   |
| Item 18.      | Financial  Statements                                                         | 126    |
|          |                                                                          |   |
| Item 19.      | Exhibits                                                                      | 126    |

 

**PRESENTATION OF FINANCIAL INFORMATION**

 

CompanhiaEnergética de Minas Gerais—CEMIG is a *sociedadede economia mista* (a state-controlled mixed capital company)organized and existing with limited liability under the laws of the FederativeRepublic of Brazil, or Brazil. References in this annual report to “CEMIG,” “we,”“us,” “our” and the “Company” are to Companhia Energética de Minas Gerais—CEMIGand its consolidated subsidiaries, except when the reference is specifically toCompanhia Energética de Minas Gerais—CEMIG (parent company only) or the contextotherwise 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.

 

Wemaintain our books and records in *reais*.We prepare our financial statements in accordance with accounting practicesadopted in Brazil, including the principles that are established primarilythrough Law No. 6,404 of December 15, 1976, as amended, including byLaw 11,638 of December 28, 2007, which we refer to as the BrazilianCorporate Law. For purposes of this annual report we prepared balance sheets asof December 31, 2009 and 2008 and the related statements of operations andcomprehensive income, 

 

i

----

Table ofContents

 

cashflows and changes in shareholders’ equity for the years ended December 31,2009, 2008 and 2007, in *reais* allin accordance with accounting principles generally accepted in the UnitedStates, or U.S. GAAP. KPMG Auditores Independentes has audited our consolidatedfinancial statements as of and for the years ended December 31, 2009, 2008and 2007, as stated in their report appearing elsewhere herein.

 

Thisannual report contains translations of certain *real*amounts into U.S. dollars at specified rates solely for the convenience of thereader. Unless otherwise indicated, such U.S. dollar amounts have beentranslated from *reais* at anexchange rate of R$1.7425 to US$1.00, the noon buying rate in New York City forcable transfers in *reais* ascertified for customs purposes by the Federal Reserve Bank of New York, or thenoon buying rate, as of December 31, 2009. See “Item 3. KeyInformation—Exchange Rates” for additional information regarding exchangerates. We cannot guarantee that U.S. dollars can be converted into *reais*, or that *reais* can be converted into U.S. dollars, at the above rateor at any other rate.

 

**Changes to Regulatory Requirements for Presentation ofFinancial Statements — Convergence to International Financial ReportingStandards (“IFRS”)**

 

***Presentation of financialstatements in accordance with IFRS***

 

OnJuly 13, 2007, the CVM issued Rule No. 457 to require listed companies topublish their consolidated financial statements in accordance with IFRSstarting with the year ending December 31, 2010.  Those consolidatedfinancial statements must be prepared based on IFRS as issued by theInternational Accounting Standards Board.

 

***Convergence of Brazilian GAAP toIFRS***

 

OnDecember 28, 2007, Law No. 11,638 was enacted and amended numerous provisionsof the Brazilian Corporate Law relating to accounting principles and authorityto issue accounting standards.  Law No. 11,638 sought to enable greaterconvergence between Brazilian GAAP and IFRS.  To promote convergence, LawNo. 11,638 modified certain accounting principles of the Brazilian CorporateLaw and required the different applicable regulators (including CVM) to issueaccounting rules conforming to the accounting standards adopted ininternational markets.  Additionally, the statute acknowledged a role inthe setting of accounting standards for the CPC, which is a committee ofofficials from the Brazilian Federal Accounting Board (*Conselho Federal de Contabilidade*),Brazilian Independent Auditors Institute (*Institutodos Auditores Independentes do Brasil*), São Paulo Stock Exchange (*BM&FBovespa S.A. — Bolsa de Valores, Mercadoriase Futuros*) or BM&FBovespa, industry representatives and academicbodies that has issued accounting guidance and pursued the improvement ofaccounting standards in Brazil.  Law No. 11,638 permits the CVM to rely onthe accounting standards issued by the CPC in establishing accountingprinciples for regulated entities.

 

Subsequentlyon May 27, 2009, Law No. 11,941 was enacted and, among other issues, amendednumerous provisions of the Brazilian Corporate Law and tax regulation, bringingBrazilian GAAP and IFRS into closer agreement.

 

Asresult of the issuance of Law No. 11,638, and Law No. 11,941, CPC has issuedapproximately 40 standards with the objective of making Brazilian GAAP similarto IFRS.  CPC has issued several standards for application beginning withthe year ended December 31, 2008 and during 2009 issued several additionalstandards.  Our management is currently in the process of analyzing thepotential impact of these new regulations and standards.

 

**MARKET POSITION AND OTHER INFORMATION**

 

Theinformation contained in this annual report regarding our market position is,unless otherwise indicated, presented for the year ended December 31, 2009and is based on, or derived from, reports issued by the *Agência Nacional de Energia Elétrica* (theBrazilian National Electric Energy Agency), or ANEEL, and by the *Câmara de Comercialização de Energia Elétrica*(the Brazilian Electric Power Trading Chamber), or CCEE.

 

Certainterms are defined the first time they are used in this annual report. As usedherein, 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 andkilowatt-hours, respectively.

 

Referencesin this annual report to the “common shares” and “preferred shares” are to ourcommon shares and preferred shares, respectively. References to “PreferredAmerican Depositary Shares” or “Preferred ADSs” are to American DepositaryShares, each representing one preferred share. References to “Common AmericanDepositary Shares” or “Common ADSs” are to American Depositary Shares, eachrepresenting one common share. Our Preferred ADSs and Common ADSs are referredto collectively as “ADSs,” and Preferred ADRs and Common ADRs are referred tocollectively as “ADRs.”

 

ii

----

Tableof Contents

 

OnMay 3, 2007, we effected a stock split in the form of a 50% stock dividend ofour preferred shares, with a corresponding adjustment to our Preferred ADSs. OnJune 11, 2007, we effected (i) the grouping of our preferred shares in the formof a consolidation whereby every 500 preferred shares, with par value R$0.01,were consolidated into one preferred share with a par value of R$5.00, and (ii)a 100% forward split of the Preferred ADSs, through which the Preferred ADSratio was changed to one preferred share per Preferred ADS. In addition, on May2, 2008, a 2.02% stock dividend was paid on the preferred shares. On May 8, 2008,a corresponding adjustment was made to the Preferred ADSs through the issuanceof additional Preferred ADSs. On April 29, 2009, a 25.000000151% stock dividendwas paid on the preferred shares. On May 13, 2009, a corresponding adjustmentwas made to the Preferred ADSs through the issuance of additional PreferredADSs. On April 29, 2010, a 10.000000128% stock dividend was paid on thepreferred shares.  On May 10, 2010, acorresponding adjustment was made to the Preferred ADSs through the issuance ofadditional Preferred ADSs.  The PreferredADSs are evidenced by American Depositary Receipts, or Preferred ADRs, issuedpursuant to a Second Amended and Restated Deposit Agreement, dated as ofAugust 10, 2001, as amended on June 11, 2007, by and among us,Citibank, N.A., as depositary, and the holders and beneficial owners ofPreferred ADSs evidenced by Preferred ADRs issued thereunder (the “SecondAmended and Restated Deposit Agreement”).

 

OnMay 3, 2007, we effected a partial stock split in the form of a 50% stockdividend of our common shares. On June 11, 2007, we effected a grouping of ourcommon shares in the form of a consolidation whereby every 500 common shares,par value R$0.01, were consolidated into one common share with a par value ofR$5.00. On June 12, 2007, we established an American Depositary Share programfor our common shares, with each Common ADS representing one common share. Inaddition, On May 2, 2008, a 2.02% stock dividend was paid on the common shares.On May 8, 2008, a corresponding adjustment was made to the Common ADSs throughthe issuance of additional Common ADS. On April 29, 2009, a 25.000000151% stockdividend was paid on the common shares. On May 13, 2009, a correspondingadjustment was made to the Common ADSs through the issuance of additionalCommon ADSs.  On April 29, 2010, a10.000000128% stock dividend was paid on the common shares. On May 10, 2010, acorresponding adjustment was made to the Common ADSs through the issuance ofadditional Common ADSs.  The Common ADSsare evidenced by American Depositary Receipts, or Common ADRs, issued pursuantto a Deposit Agreement, dated as of June 12, 2007, by and among us,Citibank, N.A., as depositary, and the holders and beneficial owners of CommonADSs evidenced by Common ADRs issued thereunder (the “Common ADS DepositAgreement” and, together with the Second Amended and Restated DepositAgreement, the “Deposit Agreements”).

 

**FORWARD-LOOKING INFORMATION**

 

Thisannual report includes forward-looking statements, principally in “Item 3. KeyInformation” and “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risk.” We have based these forward-looking statements largely on ourcurrent expectations and projections about future events and financial trendsaffecting our business. These forward-looking statements are subject to risks,uncertainties and assumptions relating to, among other things:

 

·                                          general economic, political and business conditions, principally inLatin America, Brazil, the State of Minas Gerais, in Brazil, or Minas Gerais,the State of Rio de Janeiro, in Brazil, or Rio de Janeiro, as well as otherstates in Brazil;

 

·                                          inflation and changes in currency exchange rates;

 

·                                          enforcement of legal regulation in Brazil’s electricity sector;

 

·                                          changes in volumes and patterns of consumer electricity usage;

 

·                                          competitive conditions in Brazil’s electricity generation, transmissionand distribution markets;

 

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

 

·                                          our level of debt and its maturity;

 

·                                          the likelihood that we will receive payment in connection with accountsreceivable;

 

·                                          trends in the electricity generation, transmission and distributionindustry in Brazil, and in particular in Minas Gerais and Rio de Janeiro;

 

·                                          changes in rainfall and the water levels in the reservoirs used to runour hydroelectric power generation facilities;

 

iii

----

Tableof Contents

 

·                                          our capital expenditure plans;

 

·                                          our ability to serve our consumers on a satisfactory basis;

 

·                                          our ability to renew our concessions;

 

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

 

·                                          our ability to integrate the operations of companies we have acquiredand that we may acquire;

 

·                                          existing and future policies of the Federal Government of Brazil, whichwe refer to as the Federal Government;

 

·                                          existing and future policies of the government of Minas Gerais, which werefer to as the State Government, including policies affecting its investmentin us and the plans of the State Government for future expansion of electricitygeneration, transmission and distribution in Minas Gerais; and

 

·                                          other risk factors as set forth under “Item 3. Key Information—RiskFactors.”

 

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 to the above risks and uncertainties, ourpotential expansion projects involve engineering, construction, regulatory andother significant risks, which may:

 

·                                          delay or prevent successful completion of one or more projects;

 

·                                          increase the costs of projects; and

 

·                                          result in the failure of facilities to operate or generate income inaccordance with our expectations.

 

Thewords “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar words are intended to identify forward-looking statements.We undertake no obligation to update publicly or revise any forward-lookingstatements because of new information, future events or otherwise. In light ofthese risks and uncertainties, the forward-looking information, events andcircumstances discussed in this annual report might not occur. Our actualresults and performance could differ substantially from those anticipated inour forward-looking statements.

 

iv

----

Tableof Contents

 

**PART I**

 

**Item 1.****        ****Identity of Directors, SeniorManagement and Advisers**

 

Notapplicable.

 

**Item 2.****        ****Offer Statistics and ExpectedTimetable**

 

Notapplicable.

 

**Item 3.****        ****Key Information**

 

**Selected Consolidated Financial Data**

 

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

 

Theselected consolidated financial data as of December 31, 2009 and 2008 andfor each of the three years ended December 31, 2009, 2008 and 2007 havebeen derived from our audited consolidated financial statements and the notesthereto included elsewhere in this annual report. The selected consolidateddata as of December 31, 2007, 2006 and 2005 and for the each of the twoyears ended December 31, 2006 and 2005 has been derived from our auditedconsolidated financial statements and notes thereto, which are not included inthis annual report.

 

U.S.dollar amounts in the table below are presented for your convenience. Unlessotherwise indicated, these U.S. dollar amounts have been translated from *reais* at R$1.7425 per US$1.00, the noonbuying rate as of December 31, 2009. The *real*has historically experienced high volatility. 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. On June 11,2010, the noon buying rate for *reais* was R$1.8045****per US$1.00. See “—Exchange Rates.”

 

1

----

Table of Contents

 

**Selected Consolidated Financial Data**

 
| ** **                                                       | ** ** | **As and for the year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **(in millions**                           | ** ** | ** ** | ** ** | **(In millions of R$ except per share/ADS data or as otherwise** | ** ** |
| ** **                                                       | ** ** | **of US$)(1)(2)**                          | ** ** | ** ** | ** ** | **indicated)** | ** ** |
| **Income Statement Data:**                                       | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating revenues:                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Electricity sales to final consumers                             |       | 6,309                                           |       | 10,994 |   | 10,497 |   | 10,191 |   | 9,319 |   | 8,708 |   |
| Deferred rate adjustment (3)                                     |       | —                                          |       | — |   | — |   | — |   | — |   | 110 |   |
| Electricity sales to the interconnected power  system            |       | 965                                             |       | 1,682 |   | 1,069 |   | 1,134 |   | 884 |   | 237 |   |
| Use of basic transmission and distribution  networks             |       | 1,147                                           |       | 1,999 |   | 1,865 |   | 1,705 |   | 1,780 |   | 1,523 |   |
| Other operating revenues                                         |       | 159                                             |       | 277 |   | 241 |   | 236 |   | 200 |   | 176 |   |
| Tax on revenues                                                  |       | (2,210                                          | )          | (3,852 | ) | (3,844 | ) | (3,836 | ) | (3,543 | ) | (3,241 | ) |
| Total net operating revenues                                     |       | 6,370                                           |       | 11,100 |   | 9,828 |   | 9,430 |   | 8,640 |   | 7,513 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs and expenses:                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Electricity purchased for resale                                 |       | (1,757                                          | )          | (3,061 | ) | (2,267 | ) | (2,147 | ) | (1,907 | ) | (1,455 | ) |
| Use of basic transmission and distribution  networks             |       | (434                                            | )          | (756 | ) | (634 | ) | (564 | ) | (687 | ) | (709 | ) |
| Depreciation and amortization                                    |       | (408                                            | )          | (711 | ) | (769 | ) | (878 | ) | (810 | ) | (669 | ) |
| Personnel                                                        |       | (683                                            | )          | (1,190 | ) | (1,004 | ) | (884 | ) | (1,046 | ) | (779 | ) |
| Regulatory charges                                               |       | (655                                            | )          | (1,142 | ) | (1,024 | ) | (967 | ) | (1,031 | ) | (983 | ) |
| Special liabilities                                              |       | —                                          |       | — |   | — |   | — |   | (1,057 | ) | — |   |
| Third-party services                                             |       | (418                                            | )          | (729 | ) | (605 | ) | (550 | ) | (475 | ) | (420 | ) |
| Employee post-retirement benefits                                |       | (101                                            | )          | (176 | ) | (277 | ) | (140 | ) | (245 | ) | (257 | ) |
| Materials and supplies                                           |       | (60                                             | )          | (105 | ) | (170 | ) | (148 | ) | (116 | ) | (95 | ) |
| Reversal (Provision) for loss on deferred  regulatory assets (3) |       | 5                                               |       | 8 |   | (19 | ) | (146 | ) | (49 | ) | (183 | ) |
| Employee profit sharing                                          |       | (134                                            | )          | (233 | ) | (362 | ) | (455 | ) | (210 | ) | (260 | ) |
| Other                                                            |       | (279                                            | )          | (486 | ) | (410 | ) | (472 | ) | (234 | ) | (379 | ) |
| Total operating costs and expenses                               |       | (4,924                                          | )          | (8,581 | ) | (7,541 | ) | (7,351 | ) | (7,867 | ) | (6,189 | ) |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                 |       | 1,446                                           |       | 2,519 |   | 2,287 |   | 2,079 |   | 773 |   | 1,324 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Financial income (expenses), net                                 |       | (63                                             | )          | (109 | ) | 17 |   | (48 | ) | 335 |   | 754 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Non-Operating Income                                             |       | 95                                              |       | 165 |   | 204 |   | 272 |   | 91 |   | 29 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes and minority interests                |       | 1,478                                           |       | 2,575 |   | 2,508 |   | 2,303 |   | 1,199 |   | 2,107 |   |
| Income taxes expense                                             |       | (463                                            | )          | (807 | ) | (755 | ) | (685 | ) | (497 | ) | (300 | ) |
| Net income before noncontrolling interests                       |       | 1,015                                           |       | 1,768 |   | 1,753 |   | 1,618 |   | 702 |   | 1,807 |   |
| Minority interests                                               |       | —                                          |       | — |   | — |   | — |   | — |   | 2 |   |
| Net income                                                       |       | 1,015                                           |       | 1,768 |   | 1,753 |   | 1,618 |   | 702 |   | 1,809 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                                |       | 145                                             |       | 253 |   | 299 |   | (400 | ) | 140 |   | 25 |   |
| Comprehensive income                                             |       | 1,160                                           |       | 2,021 |   | 2,052 |   | 1,218 |   | 842 |   | 1,834 |   |
|                                                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss): (5)                                       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                 |       | 1.64                                            |       | 2.85 |   | 2.83 |   | 2.66 |   | 1.15 |   | 2.98 |   |
| Per preferred share                                              |       | 1.64                                            |       | 2.85 |   | 2.83 |   | 2.66 |   | 1.15 |   | 2.98 |   |
| Per ADS                                                          |       | 1.64                                            |       | 2.85 |   | 2.83 |   | 2.66 |   | 1.15 |   | 2.98 |   |
| Diluted earnings (loss): (5)                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                 |       | 1.63                                            |       | 2.84 |   | 2.81 |   | 2.61 |   | 1.13 |   | 2.95 |   |
| Per preferred share                                              |       | 1.63                                            |       | 2.84 |   | 2.81 |   | 2.61 |   | 1.13 |   | 2.95 |   |
| Per ADS                                                          |       | 1.63                                            |       | 2.84 |   | 2.81 |   | 2.61 |   | 1.13 |   | 2.95 |   |

 

2

----

Table ofContents

 
| ** **                                            | ** ** | **As of and for the year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in millions  of US$)(1)(2)**               | ** ** | ** ** | ** ** | **(In Millions of R$ except per share/ADS data or as otherwise  indicated)** | ** ** |
| ** **                                            | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet Data:**                               | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets:                                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                        |       | 4,521                                              |       | 7,878 |   | 6,216 |   | 5,935 |   | 4,778 |   | 4,778 |   |
| Property, plant and equipment, net                    |       | 8,100                                              |       | 14,114 |   | 14,011 |   | 13,835 |   | 13,426 |   | 11,971 |   |
| Deferred regulatory assets—long-term             |       | 34                                                 |       | 60 |   | 332 |   | 823 |   | 1,548 |   | 2,315 |   |
| Account receivable from State Government              |       | 1,047                                              |       | 1,824 |   | 1,801 |   | 1,763 |   | 1,726 |   | 1,519 |   |
| Other assets                                          |       | 2,689                                              |       | 4,685 |   | 2,421 |   | 1,997 |   | 1,841 |   | 763 |   |
| Total assets                                          |       | 16,391                                             |       | 28,561 |   | 24,781 |   | 24,353 |   | 23,319 |   | 21,346 |   |
|                                                  |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                          |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Current portion of long-term financing                |       | 2,246                                              |       | 3,913 |   | 1,197 |   | 941 |   | 691 |   | 985 |   |
| Other current liabilities                             |       | 1,993                                              |       | 3,472 |   | 3,692 |   | 3,572 |   | 3,639 |   | 3,953 |   |
| Long-term financing                                   |       | 3,078                                              |       | 5,364 |   | 5,314 |   | 5,873 |   | 5,833 |   | 3,841 |   |
| Employee post-retirement benefits—long-term      |       | 751                                                |       | 1,308 |   | 1,765 |   | 2,182 |   | 1,666 |   | 1,535 |   |
| Shareholders’ equity                             |       | 5,982                                              |       | 10,423 |   | 9,333 |   | 8,224 |   | 8,370 |   | 9,252 |   |
| Capital stock                                         |       | 1,669                                              |       | 2,908 |   | 2,288 |   | 2,239 |   | 1,428 |   | 1,428 |   |
| ** **                                            | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Data:**                                       |       |                                               |       |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average outstanding shares—basic: (5)   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | 271,154,243 |   | 271,154,243 |   | 265,778,129 |   | 265,778,129 |   | 275,778,129 |   |
| Preferred                                             |       |                                               |       | 349,015,265 |   | 348,963,420 |   | 342,039,463 |   | 342,039,463 |   | 342,039,463 |   |
| Dividends per share (5)                               |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | R$ | 1.50 |   | R$ | 1.52 |   | R$ | 2.24 |   | R$ | 2.22 |   | R$ | 2.95 |   |
| Preferred                                             |       |                                               |       | R$ | 1.50 |   | R$ | 1.52 |   | R$ | 2.24 |   | R$ | 2.22 |   | R$ | 2.95 |   |
| Dividends per ADS (5)                                 |       |                                               |       | R$ | 1.50 |   | R$ | 1.52 |   | R$ | 2.24 |   | R$ | 2.22 |   | R$ | 2.95 |   |
| Dividends per share (4)(5)                            |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.26 |   | US$ | 1.04 |   | US$ | 1.27 |   |
| Preferred                                             |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.26 |   | US$ | 1.04 |   | US$ | 1.27 |   |
| Dividends per ADS (4)(5)                              |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.26 |   | US$ | 1.04 |   | US$ | 1.27 |   |
|                                                  |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average outstanding shares—diluted: (5) |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | 273,850,193 |   | 274,634,801 |   | 278,078,200 |   | 279,007,398 |   | 271,003,364 |   |
| Preferred                                             |       |                                               |       | 349,015,265 |   | 348,963,420 |   | 342,039,463 |   | 342,039,463 |   | 342,039,463 |   |
| Dividends per share diluted (5)                       |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | R$ | 1.49 |   | R$ | 1.51 |   | R$ | 2.20 |   | R$ | 2.17 |   | R$ | 2.92 |   |
| Preferred                                             |       |                                               |       | R$ | 1.49 |   | R$ | 1.51 |   | R$ | 2.20 |   | R$ | 2.17 |   | R$ | 2.92 |   |
| Dividends per ADS diluted (5)                         |       |                                               |       | R$ | 1.49 |   | R$ | 1.51 |   | R$ | 2.20 |   | R$ | 2.17 |   | R$ | 2.92 |   |
| Dividends per share diluted (4)(5)                    |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                                                |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.24 |   | US$ | 1.02 |   | US$ | 1.25 |   |
| Preferred                                             |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.24 |   | US$ | 1.02 |   | US$ | 1.25 |   |
| Dividends per ADS diluted (4)(5)                      |       |                                               |       | US$ | 0.86 |   | US$ | 0.66 |   | US$ | 1.24 |   | US$ | 1.02 |   | US$ | 1.25 |   |

 

----

(1)                                 Converted at the exchangerate of US$1.00 to R$1.7425, the noon buying rate as of December 31, 2009.See “—Exchange Rates.”

(2)                                 In millions, except pershare/ADS data.

(3)                                 See Note 4 to ourconsolidated financial statements.

(4)                                 This information ispresented in U.S. dollars at the noon buying rate in effect as of the end ofeach year.

 

3

----

Table ofContents

 

(5)                                 Per share numbers have beenadjusted to reflect the stock dividend and consolidation of our shares, and perPreferred ADS numbers have been adjusted to reflect the 100% forward split ofour Preferred ADSs, each of which occurred in May and June 2007. Inaddition, per share numbers have been adjusted to reflect the stock dividendson our shares in May 2008 and May 2009, and per ADS numbers have beenadjusted to reflect the corresponding adjustments to our ADS.

 

**Exchange Rates**

 

InMarch 2005, the National Monetary Council (*ConselhoMonetário Nacional*), or CMN, consolidated the commercial rateexchange market and the foreign exchange market into a single floating rateexchange market, where all foreign exchange transactions are now carried out byfinancial institutions authorized by the Central Bank to operate in thismarket.

 

Brazilianlaw provides that whenever there (i) is a significant imbalance in Brazil’sbalance of payments or (ii) are major reasons to foresee a significantimbalance in Brazil’s balance of payments, temporary restrictions may beimposed on remittances of foreign capital abroad. In the past, the Central Bankhas intervened occasionally to control unstable movements in foreign exchangerates. We cannot predict whether the Central Bank or the Federal Governmentwill continue to let the *real* floatfreely or will intervene in the exchange rate market. The *real*may depreciate or appreciate against the U.S. dollar and other currenciessubstantially in the future. Exchange rate fluctuations may affect the U.S. dollaramounts received by the holders of Preferred ADSs or Common ADSs. We will makeany distributions with respect to our preferred shares or common shares in *reais* and the depositary will convert these distributionsinto U.S. dollars for payment to the holders of Preferred ADSs and Common ADSs.Exchange rate fluctuations may also affect the U.S. dollar equivalent of the *real* price of the preferred shares or common shares on theBrazilian stock exchange where they are traded. Exchange rate fluctuations mayalso affect our results of operations. For more information see “Risk Factors —Exchange rate instability may adversely affect our business, results ofoperations and financial condition and the market price of our shares, thePreferred ADSs and the Common ADSs.”

 

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

** **
| ** **         | ** ** | **Reais per US$1.00** | ** ** |
|--------------------|------------|---------------------------------|------------|
| **Month**          | ** ** | **Low**                         | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
| December 2009 |       | 1.7050                          |       | 1.7905 |   | 1.7508 |   | 1.7425 |   |
| January 2010  |       | 1.7200                          |       | 1.8755 |   | 1.7817 |   | 1.8755 |   |
| February 2010 |       | 1.8010                          |       | 1.8865 |   | 1.8403 |   | 1.8082 |   |
| March 2010    |       | 1.7620                          |       | 1.8207 |   | 1.7855 |   | 1.7821 |   |
| April 2010    |       | 1.7270                          |       | 1.7780 |   | 1.7568 |   | 1.7270 |   |
| May 2010      |       | 1,7360                          |       | 1,8850 |   | 1,8142 |   | 1,8170 |   |
| June 2010 (1) |       | 1,8045                          |       | 1,8651 |   | 1,8326 |   | 1,8045 |   |

 

----

(1)As of June 11, 2010. 

 
| ** **                                 | ** ** | **Reais per US$1.00** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **Year Ended December 31,** | ** ** | **Low**                         | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
| 2005                                       |       | 2.1695                          |       | 2.7755 |   | 2.4352 |   | 2.3340 |   |
| 2006                                       |       | 2.0549                          |       | 2.3580 |   | 2.1738 |   | 2.1342 |   |
| 2007                                       |       | 1.7298                          |       | 2.1520 |   | 1.9449 |   | 1.7790 |   |
| 2008                                       |       | 1.5580                          |       | 2.6190 |   | 1.8322 |   | 2.3130 |   |
| 2009                                       |       | 1.6995                          |       | 2.4420 |   | 1.9976 |   | 1.7425 |   |

 

----

Source:U.S. Federal Reserve Board

 

4

----

Table ofContents

 

**Risk Factors**

 

*You should consider the following risks as well as the otherinformation in this annual report in evaluating an investment in our company.*

 

**Risks Relating to CEMIG**

 

*We are controlled by the State Government which may have interests thatare different from yours.*

 

Asour controlling shareholder, the government of the State of Minas Geraisexercises substantial influence on the strategic orientation of the business ofCEMIG. Elections will be held in Minas Gerais in October 2010. The periodbefore the election may result in changes to the existing governmentalpolicies, and the post-election administration may seek to implement newpolicies. The government of the State of Minas Gerais currently holdsapproximately 51% of our common shares and, consequently, has the right to themajority of votes in decisions of the General Meetings of our Shareholders, andcan (i) elect the majority of the members of the Board of Directors ofCEMIG, and (ii) decide matters requiring approval by a specific majorityof our shareholders, including transactions with related parties, shareholdingreorganizations and the date and payment of any dividends. It is not possibleto analyze the impact and effects this may have on us or our results ofoperations. 

 

Theoperations of CEMIG have had and will continue to have an important impact onthe commercial and industrial development of the State of Minas Gerais, and onits social conditions. In the past, the State Government has, and may in thefuture, use its status as our controlling shareholder to decide that we shouldengage in certain activities and make certain investments aimed, principally,to promote its political, economic or social objectives and not necessarily tomeet the objective of improving our business and/or operational results.

 

*We are subject to extensive and uncertain governmental legislation andregulation.*

 

TheBrazilian Federal Government has been implementing policies that have afar-reaching impact on the Brazilian power industry and, in particular, theelectricity industry. As part of the restructuring of the industry, Federal LawNo. 10,848 of March 15, 2004, or the New Industry Model Law, introduceda new regulatory framework for the Brazilian electricity industry.

 

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

 

*The rules for the sale of electric energy and market conditionscould affect our energy selling prices.*

 

Underapplicable law, our generation companies are not allowed to sell energydirectly to our distribution companies. As a result, our generation companieshave to sell electricity in a regulated market through public auctionsconducted by ANEEL (the “Regulated Market,” the “ACR,” or the “Pool”) or in theFree Market (the “ACL”). Legislation allows distributors that contract with ourgeneration companies under the Regulated Market to reduce the quantity ofenergy contracted under some agreements up to a certain limit, exposing ourgeneration companies to the risk of failing to sell its remaining energy atadequate prices.

 

Weperform trading activities through power purchase and sale agreements, mainlyin the ACL, through our generation and trading subsidiaries.  Contracts in the ACL with consumers that areallowed to purchase energy directly from generating companies or from energytraders, referred to as “Free Consumers,” are generally consumers with demandequal to or greater than 3 MW or consumers with demand between 500 kW and 3 MWfrom so-called “renewable energy sources,” such as small hydroelectricfacilities and cogeneration plants, mainly ethanol plants. Older contracts withconsumers greater 

 

5

----

Table of Contents

 

than3MW give them the flexibility to purchase more or less energy (by 5% onaverage) from us than was originally contracted for by such consumers, whichmay adversely impact our business, results of operations and financialcondition. Newer contracts, signed after 2005 generally do not allow for thiskind of flexibility in the purchase of energy.

 

Despitethe strategy described in the Power Generation and Trading section, lack ofliquidity for execution of the trading policy or volatility in future prices dueto market conditions and/or market perceptions may negatively affect ourexpected results. Also, if we are unable to sell all the power capacity in theregulated auctions or in the free market, the unsold capacity will be settledin the CCEE at a settlement price (Preço de Liquidação de Diferenças), or PLD,which tends to be very volatile, especially over the last few years. If thisoccurs in periods of low settlement prices, our revenues and results ofoperations could be adversely affected.

 

*ANEEL has substantial discretion to establish therates we charge to captive consumers. Such rates are determined pursuant toconcession contracts entered with ANEEL on behalf of the Federal Government andin accordance with ANEEL’s regulatory decision-making authority.*

 

Concessionagreements and Brazilian law establish a price cap mechanism that permits threetypes of rate adjustments: (1) the annual readjustment; (2) theperiodic revision; and (3) the extraordinary revision. We are entitled toapply each year for the annual readjustment, which is designed to offset someof the effects of inflation on rates and allows us to pass through to consumerscertain changes in our cost structure that are beyond our control, such as thecost of electricity we purchase and certain other regulatory charges, includingcharges for the use of transmission and distribution facilities. In addition,ANEEL carries out a periodic tariff revision every five years that is aimed atidentifying variations in our costs as well as setting a factor based on ouroperational efficiency that will be applied against the index of our ongoingannual rate adjustments, the intended effect of which is to reward the goodmanagement of our costs while sharing any related gains with our consumers. Weare also entitled to request an extraordinary revision of our rates ifunforeseen events significantly alter our cost structure. The periodic revisionand extraordinary revision are subject to a certain degree of ANEEL’sdiscretion.

 

Althoughour concession agreements provide that the company must remain in economic andfinancial balance, we cannot assure you that ANEEL will establish rates thatwill adequately compensate us and that our revenues and results of operationswill not be adversely affected by such rates. In addition, to the extent any ofthese adjustments are not granted by ANEEL in a timely manner, our business,results of operations and financial condition may be adversely affected.

 

*We may not be able to collect the full amount of a significant receivablefrom the State Government.*

 

Wehave an account receivable from the State Government, referred to as theContrato de Cessão de Crédito de Saldo Remanescente, or CRC Account, thattotaled R$1,824 million as of December 31, 2009. The agreement betweenCEMIG and the State Government that governs the CRC Account receivable isreferred to as the CRC Account Agreement. We have renegotiated and amended theterms of the CRC Account on a number of occasions in connection with thisdifficulty. We cannot assure you we will be paid on a timely basis in thefuture. See “Item 5. Operating and Financial Review and Prospects—Impact of OurAccount Receivable from the State Government.”

 

*We are strictly liable for any damages resulting from inadequaterendering of electricity services.*

 

UnderBrazilian law, we are strictly liable for direct and indirect damages resultingfrom the inadequate rendering of electricity transmission and distributionservices. In addition, the damages caused to end consumers as a result of interruptionsor disturbances arising from the generation, transmission or distributionsystems, whenever these interruptions or disturbances are not attributed to anidentifiable member of the National System Operator (*OperadorNacional do Sistema*, or ONS) or the ONS itself, shall be sharedamong generation, distribution and transmission companies. Until a finalcriteria is defined, the liability for such damages shall be shared in theproportion of 35.7% to distribution agents, 28.6% to transmission agents and35.7% to generation agents.  Theseproportions are established by the number of votes that each class of energyconcessionaires receives at ONS’s General Meeting, and as such, they aresubject to change in the future. Therefore, our business, results of operations and financial conditionmay be adversely affected.

 

*We are subject to rules and limits applied to levels of publicsector borrowing and to restrictions on the use of certain funds we raise,which could prevent us from obtaining financing.*

 

Asa state controlled company, we are subject to rules and limits on thelevel of credit applicable to the public sector issued by the CMN and by theCentral Bank. These rules set certain parameters and conditions forfinancial institutions to be able to offer credit to public sector entities.Thus, if our operations do not fall within these parameters and conditions, wemay have difficulty in obtaining financing from Brazilian financialinstitutions, which could create difficulties in the 

 

6

----

Table of Contents

 

implementationof our investment plan. Brazilian legislation also establishes that astate-controlled company, in general, may only use proceeds of externaltransactions with commercial banks (debt, including bonds) to refinancefinancial obligations. As a result of these regulations, our capacity to incurdebt is again limited, and this could negatively affect the implementation ofour investment plan.

 

*There are contractual restrictions on our capacity to incur debt.*

 

Weare subject to certain restrictions on our ability to incur debt due tocovenants set forth in our loan agreements. In the event of our non-compliancewith any such covenants in our loan agreements, the total principal, futureinterest and any penalties due under these agreements may become immediatelydue and payable. In the past, and in2009, in particular, we have, at times, been in non-compliance with our covenantsunder our loan agreements, and although we were able to obtain waivers from ourcreditors in regards to such non-compliance, no assurance can be given that wewould be successful in obtaining any waivers in the future. Early maturityof our obligations could adversely affect our financial condition especially inlight of cross default provisions in several of our loan and financingcontracts. The existence of limitations on our indebtedness could prevent usfrom executing new agreements to finance our operations or to refinance ourexisting obligations which could adversely affect our business, results ofoperations and financial condition.

 

*We could be penalized by ANEEL for failing to comply with the terms andconditions of our concession agreements, and/or the authorizations granted tous, which could result in fines, other penalties and, depending on the severityof non-compliance, expropriation of the concession agreements or revocation ofthe authorizations.*

 

Weconduct our generation, transmission and distribution activities pursuant toconcession agreements entered into with the Federal Government through ANEELand/or pursuant to authorizations granted to the companies of our portfolio, asthe case may be.. ANEEL may impose penalties on us if we fail to comply withany provision of the concession agreements, including compliance with theestablished quality standards. Depending on the severity of the non-compliance,these penalties could include:

 

·                                          fines per breach of up to 2.0% of the concessionaire’s revenues in theyear ended immediately prior to the date of the relevant breach;

 

·                                          injunctions related to the construction of new facilities and equipment;

 

·                                          restrictions on the operation of existing facilities and equipment;

 

·                                          temporary suspension from participating in bidding processes for newconcessions for a term up to two years;

 

·                                          intervention by ANEEL in the management of the concessionaire in breach;and

 

·                                          termination of the concession.

 

Inaddition, the Federal Government has the power to terminate any of ourconcessions or authorizations, 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.

 

Also,delays regarding the implementation and construction of new energy undertakingscan also trigger the imposition of regulatory penalties by ANEEL, which, inaccordance to ANEEL ́’s Resolution No. 63 dated May 12, 2004, can varyfrom warnings to the early termination of these concessions or authorizations.

 

Wecannot assure you that ANEEL will not impose penalties or terminate ourconcessions or authorizations in the event of a breach. Any compensation we mayreceive upon the termination of the concession contract and/or theauthorizations may not be sufficient to compensate us for the full value ofcertain investments. If any of our concession agreements are terminated and weare at fault, the effective amount of compensation could be reduced throughfines or other penalties. Termination or imposition of penalties couldadversely affect our business, results of operations and financial condition.

 

7

----

Table of Contents

 

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

 

Wecarry out the vast majority of our power generation, transmission anddistribution activities pursuant to concession agreements entered into with theFederal Government. The Brazilian Constitution requires that all concessionsrelating to public services be awarded through a bidding process. In 1995, inan effort to implement these constitutional provisions, the Federal Governmentadopted certain laws and regulations, known collectively as the Concessions Law,governing bidding procedures in the power industry. In accordance with theConcessions Law, as modified by the New Industry Model Law, upon application bythe concessionaire, existing concessions may be renewed by the FederalGovernment for additional periods of up to 20 years without being subject tothe bidding process, provided that the concessionaire has met minimumperformance standards and that the proposal is otherwise acceptable to theFederal Government.

 

Inlight of the degree of discretion granted to the Federal Government— which isfrequently advised by ANEEL- by the Concessions Law with respect to newconcession contracts and the renewal of existing concessions, and given thelack of long-standing precedents with respect to the Federal Government’sexercise of such discretion and interpretation and application of theConcessions Law, we cannot assure you that new concessions will be obtained orthat concessions will be renewed on terms as favorable as those currently ineffect. “Item 4. Information on the Company—Competition—Concessions” and “Item4. The Brazilian Power Industry—Concessions.” Non-renewal of any of ourconcessions could adversely affect our business, results of operations andfinancial condition.

 

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

 

TheBrazilian electricity industry is highly concentrated in hydroelectricgeneration and faces a natural limitation on its generation capacity, ashydroelectric power plants cannot generate more electricity than is madepossible by the country’s water resources. As a result, natural factors mayaffect our generating capacity, by increasing or reducing the level ofreservoirs. Control of the level of reservoirs by the ONS seeks to optimize thelevel of water available for hydroelectric generation in each of the powerplants associated with the respective reservoirs. In this context, the ONScould, for example, prevent a generating plant located at the beginning of ariver from increasing its throughput of water, if this increase were tonegatively affect other plants further downstream. In the same way, the ONS maydecide to increase thermal generation and reduce hydroelectric generation in orderto conserve water in the reservoirs.

 

Shortagesand/or rationing due to adverse hydrological conditions not covered by theEnergy Reallocation Mechanism (as described in “Item 4. The Brazilian PowerIndustry—Energy Reallocation Mechanism”) could result in increased costs andreduced cash flow. In addition, if the new energy auctions under the NewIndustry Model Law fail to result in an expansion in electricity generationcapacity to adequate levels to meet growing demand, rationing measures could beimplemented. Any limitation on our electricity generation capacity couldadversely affect our business, results of operations and financial condition.

 

*Delays in the expansion of our facilities may significantly increaseour costs.*

 

Weare currently engaged in the construction of additional hydroelectric and windfarm power plants and the evaluation of other potential expansion projects. Ourability to complete an expansion project on time, within a determined budgetand without adverse economic effects, is subject to a number of risks. Forinstance:

 

·                                          we may experience problems in the construction phase of an expansionproject;

 

·                                          we may face regulatory or legal challenges that delay the initialoperation date of an expansion project;

 

·                                          our new or modified facilities may not operate at designated capacity ormay cost more to operate than we expect;

 

·                                          we may not be able to obtain adequate working capital to finance ourexpansion projects; and

 

·                                          we may encounter environmental issues and claims by the local populationduring power plant construction.

 

Ifwe experience these or other problems relating to the expansion of ourelectricity generation, transmission or distribution capacity, our ability tosell electric energy in amounts in line with our projections may be harmed andwe may be exposed to increased costs. Consequently, we may fail to produce therevenues we anticipate in connection with such expansion projects.

 

8

----

Table of Contents

 

*Impositions and restrictions by the environmental agencies could causeadditional 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— such as the building and operation ofa potentially polluting facility without a valid environmental license orauthorization- could, independently of the obligation to redress any damagesthat may be caused, result in criminal, civil and administrative sanctionsbeing applied. Based on Brazilian legislation, criminal penalties such asrestricting rights, and even imprisonment, may be applied to individuals(including managers of legal entities), and penalties such as fines,restriction of rights or community service may be applied to legal entities.With respect to administrative sanctions, depending on the circumstances, theenvironmental authorities may impose warnings and fines ranging from R$50thousand to R$50 million, require partial or total suspension of activities;suspend or restrict tax benefits or cancel or suspend lines of credit fromgovernmental financial institutions as well as prohibit the entity fromcontracting with governmental agencies, companies and authorities. Any of theseevents could adversely affect our business, results of operations or financialcondition.

 

Furthermore,if the activities undertaken by CEMIG result, either directly or indirectly, inany environmental damage, it shall be liable for carrying out remediation,compensation or indemnification measures, the maximum value of which is notdefined by law. Delays or denials of license requests by the competentenvironmental entities, as well as our possible inability to meet therequirements established by the environmental authorities during theenvironmental licensing processes, may result in additional costs, or evenprohibit, as applicable, the construction and maintenance of these projects.

 

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

 

Finally,the adoption or implementation of new safety, health and environmental laws andregulations, new interpretations of existing laws, increased governmentalenforcement of environmental laws or other developments in the future mayrequire us to make additional capital expenditures or incur additionaloperating expenses in order to maintain our current operations, curtail ourproduction activities or take other actions that could have material adverseeffect on our financial condition, results of operations and cash flow.

 

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

 

Asof December 31, 2009, our total past due receivables from final consumerswere approximately R$877 million, corresponding to 7.94% of our net revenuesfor 2009, and our allowance for doubtful accounts was R$238 million.Approximately 8.3% of the past due receivables were owed by entities in thepublic sector. We may be unable to recover debts from several municipalitiesand other defaulting clients. If these debts are not totally or partiallyrecovered, we will experience an adverse impact on our business, results ofoperations and financial condition. In addition, any consumer defaults inexcess of our allowance for doubtful accounts could have an adverse effect onour business, results of operations and financial condition.

 

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

 

Ourby-laws contemplate that we spend up to 40.0% of our annual EBITDA (earningsbefore interest, income taxes, depreciation and amortization), each fiscalyear, on capital investments and acquisitions. In the Extraordinary GeneralMeeting of Shareholders held on June 17, 2010, the shareholders approvedthe increase of this limit up to 90% of the 2010 EBITDA.  Our ability to carry out this capitalexpenditure program is dependent upon a number of factors, including ourability to charge adequate rates for our services, our access to domestic andinternational capital markets and a variety of operating and other factors. Inaddition, our plans to expand our generation and transmission capacity aresubject to the competitive bidding process governed by the Concessions Law. Wecannot give any assurance that we will have the financial resources to completethis program.

 

*Our ability to distribute dividends is subject to limitations.*

 

Whetheror not you receive dividends depends on whether our financial condition permitsus to distribute dividends under Brazilian law, whether our shareholders, onthe recommendation of our Board of Directors acting in its discretion,

 

9

----

Table of Contents

 

determinethat our financial condition warrants a suspension of the distribution ofdividends in addition to the amount of mandatory distribution required underour by-laws, in case of preferred shares.

 

Because—CEMIGis a holding company with no revenue-producing operations other than those ofits operating subsidiaries, we will be able to distribute dividends toshareholders only if—CEMIG receives dividends or other cash distributions fromits operating subsidiaries. The dividends that our subsidiaries may distributeto us depend on our subsidiaries generating a sufficient profit in any givenfiscal year. Dividends can be paid out from accumulated profits from previousyears or from capital reserves. Such profits are calculated and paid inaccordance with Brazilian Corporate Law and the provisions of the by-laws ofeach of our regulated subsidiaries.

 

*We operate without general third party liability and catastropheinsurance policies.*

 

Wedo not have general third party liability insurance covering accidents and havenot asked for bids related to this type of insurance. In addition, we have notasked 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 catastrophicevents may adversely affect our business, results of operations or financialcondition. See “Item 10. Additional Information—Insurance.” Also, we may incurliabilities beyond the limits provided in our current existing insurancepolicies.

 

*We will need short-term funds to pay our obligations and to fund ourcurrent and expected acquisitions.*

 

OnDecember 31, 2009, our total debt was R$9,277 million, of which R$3,913million matures in 2010. Notwithstanding the fact that we have already rolledover****part of these obligations, through theissuance of R$2,700 million in long-term notes, we will still need funds in theshort term to pay or refinance the remainder of these obligations and to fundour current and expected acquisitions and investments. However, no assurancecan be given that we will be able to raise such funds in a timely manner and inthe amounts necessary or at competitive rates, or that we will otherwise havesupplemental cash-on-hand available to pay our obligations or finance ouracquisitions. If we are unable to successfully raise funds as planned, we maynot be able to entirely pay our debt ormeet all our acquisition commitments, and our investment program couldsuffer significant delays or changes, which could adversely affect ourbusiness, financial condition and prospects.

 

*We may incur losses in connection with pending litigation.*

 

Weare currently defending several legal proceedings relating to civil,administrative, environmental, tax and other claims. These claims involve awide range of issues and seek substantial amounts of money. Several individualdisputes account for a significant part of the total amount of claims against us.Our consolidated financial statements include reserves relating to litigationclaims totaling R$ 566 million as of December 31, 2009 (excludinglabor-related matters) for probable and reasonably estimable losses andexpenses we may incur in connection with pending litigation. In the event thatour reserves for litigation claims prove to be insufficient, the payment oflitigation claims in an amount in excess of the reserved amounts could have anadverse effect on our business, results of operations or financial condition.Also, any negative outcome with respect to any litigation could adverselyaffect our reputation.

 

*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 have entered into collective bargaining agreementswith the labor unions representing most of these employees.

 

We are currently defending anumber of labor-related claims brought by our employees that generally relateto overtime and compensation for occupational hazards. We are also subject toclaims related to outsourcing of services, in which employees of ourcontractors and subcontractors have brought actions against us for the paymentof outstanding labor liabilities.As of December 31, 2009, our labor-related claims totaled, in theaggregate, approximately R$279 million, and at that date we had accrued aliability of approximately R$81 million (not including judicial deposits) forlosses we expect from these claims. For a more detailed discussion oflabor-related proceedings, see “Item 8. Financial Information—LegalProceedings—Labor and Pension Fund Obligations.”

 

Wehave not experienced any material labor unrest during the last three years,although in 2007 four work stoppages occurred, in 2008 one minor work stoppage occurred,and in 2009, one minor work stoppage occurred. Our operations might beinterrupted by a labor disturbance in the future. We do not carry insurance forlosses incurred as a result of business interruptions caused by labor action.In the event of a strike, we might face an immediate loss of revenue.

 

10

----

Table of Contents

 

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 consumers expect.

 

*Foreign shareholders may not be able to enforce judgments against ourdirectors or officers.*

 

Allof our directors and officers named in this annual report reside in Brazil.Substantially all of our assets, as well as the assets of these persons, arelocated in Brazil. As a result, it may not be possible for foreign shareholdersto effect service of process within the United States or other jurisdictionsoutside Brazil upon these persons, attach their assets, or enforce against themor us in United States courts, or the courts of other jurisdictions outsideBrazil, judgments predicated upon the civil liability provisions of thesecurities laws of the United States or the laws of such other jurisdictions.See “Item 10. Additional Information—Difficulties of Enforcing CivilLiabilities Against Non-U.S. Persons.”

 

**Risks Relating to Brazil**

 

*The Federal Government exercises significant influence on the Brazilianeconomy. Political and economic conditions can have a direct impact on ourbusiness.*

 

TheFederal Government intervenes frequently in the country’s economy andoccasionally makes significant changes in monetary, fiscal and regulatorypolicy. Our business, results of operations or financial condition may beadversely affected by changes in government policies, and also by:

 

·                                          fluctuations in the exchange rate;

 

·                                          inflation;

 

·                                          instability of prices;

 

·                                          changes in interest rates;

 

·                                          fiscal policy;

 

·                                          other political, diplomatic, social and economic developments which mayaffect Brazil or the international markets;

 

·                                          control on capital flow; and

 

·                                          limits on foreign 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 financial condition.If the political and economic situations deteriorate, we may face increasedcosts.

 

Apresidential election will be held in Brazil in October 2010. ThePresident of Brazil has considerable power to determine governmental policiesand actions that relate to the Brazilian economy and consequently, affect theoperations and financial performance of businesses, such as our company. Theperiod before the presidential election may result in changes to the existinggovernmental policies, and the post-election administration may seek toimplement new policies. We cannot assure you that the policies of the currentor any new administration would not have an adverse effect on the Brazilianeconomy, our business, results of operations or financial condition.

 

*Inflation and certain governmental measures to curb inflation maycontribute significantly to economic uncertainty in Brazil and could harm ourbusiness and the market value of our shares, the Preferred ADSs and the CommonADSs.*

 

Brazil has in the past experiencedextremely high rates of inflation. Inflation, and some of the FederalGovernment’s measures taken in an attempt to curb inflation, have had significantnegative effects on the Brazilian economy. Since the introduction of the *real* in 1994, Brazil’s inflation rate has been substantiallylower than in previous periods. According to the 

 

11

----

Table of Contents

 

AmplifiedNational Consumer Price Index, or IPCA, Brazilian annual inflation rates in2007, 2008 and 2009 were 4.5%, 5.9% and 4.3% respectively. No assurance can be given that inflation will remain atthese levels.

 

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

 

Substantially all of our cashoperating expenses are denominated in *reais* and tendto increase with Brazilian inflation. Inflationary pressures may also hinderour ability to access foreign financial markets or may lead to furthergovernment intervention in the economy, including the introduction ofgovernment policies that could harm our business, results of operations andfinancial condition or adversely affect the market value of our shares and as aresult, our Preferred ADSs and Common ADSs.

 

*Exchange rate instability may adversely affect our business, results ofoperations and financial condition and the market price of our shares, thePreferred ADSs and the Common ADSs.*

 

The Brazilian currency has beendevalued periodically during the last four decades. Throughout this period, theFederal Government has implemented various economic plans and utilized a numberof exchange rate policies, including sudden devaluations, periodicmini-devaluations during which the frequency of adjustments has ranged fromdaily to monthly, floating exchange rate systems, exchange controls and dualexchange rate markets. Although over long periods depreciation of the Braziliancurrency generally has correlated with the rate of inflation in Brazil,devaluation over shorter periods has resulted in significant fluctuations inthe exchange rate between the Brazilian currency and the U.S. dollar andcurrencies of other countries.

 

In 2009, the *real*appreciated 24.7% againstthe U.S. dollar. Between December 31, 2009 and April 1, 2010, the *real*appreciated 0.89% against the U.S. dollar. Considering the volatility theworld economy is facing, no assurance can be given that the *real*will not depreciate against the dollar again. OnDecember 31, 2009, the noon buying U.S. dollar/*real* exchange rate was R$1.7425/US$1.00. See “—Exchange Rates.”

 

Asof December 31, 2009, approximately 2.1% of our total indebtedness fromloans, financings and debentures was denominated in currencies other than the *real* (90.0% of that in U.S. dollars). Ifthe *real*depreciates against the U.S.dollar, our related financial expenses will increase and our results ofoperations and financial condition could be adversely affected. Our foreignexchange losses decreased from R$113 million in 2008 to R$95 million in 2009.

 

We also have entered into certainpower purchase agreements that are dollar denominated. We cannot assure youthat these derivatives instruments and the proceeds from our dollar-denominatedpurchase agreements will be sufficient to avoid an adverse effect on ourbusiness, results of operations and financial condition in case of unfavorableexchange rate fluctuations. See “Item 11. Quantitative and QualitativeDisclosures about Market Risk—Exchange Rate Risk” for information about ourforeign exchange risk hedging policy.

 

*Changes in economic and marketconditions in other countries, especially Latin American and emerging marketcountries, may adversely affect our business, results of operations andfinancial condition, as well as the market price of our shares, the PreferredADS and the Common ADSs.*

 

The market value of securities ofBrazilian companies is affected to varying degrees by economic and marketconditions in other countries, including other Latin American and emergingmarket countries. Although economic conditions in such countries may differsignificantly from economic conditions in Brazil, investors’ reactions todevelopments in these other countries may have an adverse effect on the marketvalue of securities of Brazilian issuers. Crises in other emerging marketcountries may diminish investor interest in securities of Brazilian issuers,including us. This could also make it more difficult for us to access thecapital markets and finance our operations in the future on acceptable terms orat all. Due to the characteristics of the Brazilian power industry (whichrequires significant investments in operating assets) and due to our financingneeds, if access to the capital and credit markets is limited, we could face difficultiesin completing our investment plan and refinancing our obligations which couldadversely affect our business, results of operations and financial condition.

 

12

----

Table of Contents

 

*Political and economicinstability in Brazil may affect us.*

 

Periodically,allegations of unethical or illegal conduct might be made with respect tofigures in the Brazilian government, including legislators and/or partyofficials. Presidential elections will take place in October 2010 andalthough the current political environment is more stable than in past years,no assurance can be given that this situation will endure.

 

Ifsuch events lead to a materially adverse perception of Brazil among investors,the trading value of our shares, the Preferred ADSs and the Common ADSs coulddecline, and our ability to access international markets could suffer. Inaddition, any political instability resulting from such events could cause usto re-assess our strategies if the Brazilian economy suffers as a result.

 

*Our reported financial condition and results could be affected bychanges in Brazilian Accounting Principles due to the convergence to IFRS.*

 

BrazilianAccounting Principles have been undergoing rapid change pursuant to legislationadopted late in 2007, requiring among other things that Brazilian accountingstandard-setters move toward convergence with IFRS, which will be mandatory by2010. Many new accounting standards have been adopted and are currently beingimplemented. Others are expected in the near future. We cannot yet predict theeffects on our financial statements that will result when these changes takeeffect. These effects could include reducing our reported revenues, operatingincome or net income, or adversely affecting our balance sheet. Such changescould adversely affect our compliance with financial covenants under ourfinancing facilities. They could also reduce the ability of our subsidiaries topay dividends to us, or our ability to pay dividends to our shareholders.

 

Twoaspects of IFRS that could have a material impact on us are the recognition ofregulatory assets and accounting for our concessions. Accounting for ourconcessions includes a potential reclassification of property, plants andequipment as intangible assets, financial assets, or both. Under BrazilianAccounting Principles and U.S. GAAP, we recognize as assets and liabilitiescertain amounts that we are legally entitled to collect, or required to pay, inthe future under the regulations applicable to our distribution subsidiaries.Depending on the outcome of the convergence with IFRS, accounting forregulatory assets and liabilities may have a material effect on our reportedfinancial condition and results of operations. See “Item 5. Operating andFinancial Review and Prospects.” We and other similarly situated Braziliancompanies are discussing these points with the Brazilian standard-setters andregulators, but we cannot predict the outcome of those discussions or theultimate manner in which IFRS or Brazilian accounting standards based on IFRSwill apply to us.

 

**Risks Relating to the Preferred Shares, Preferred ADSs andCommon ADSs**

 

*The preferred shares and Preferred ADSs and the Common ADSs generallydo not have voting rights.*

 

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

 

*Exchange controls and restrictions on remittances abroad may adverselyaffect holders of Preferred ADSs and Common 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 Government imposed remittance restrictions forapproximately three months in late 1989 and early 1990. Restrictions like thesewould hinder or prevent the conversion of dividends, distributions or theproceeds from any sale of preferred shares or common shares from *reais* into U.S. dollars and the remittance of U.S. dollarsabroad. We cannot assure you that the Federal Government will not take similarmeasures in the future. See “Item 3. Key Information—Exchange Rates.”

 

*Changes in Brazilian tax laws may have an adverse impact on the taxesapplicable to a disposition of our shares, Preferred ADSs or Common ADSs.*

 

LawNo. 10,833 of December 29, 2003 provides that the disposal of assetslocated in Brazil by a non-resident to either a Brazilian resident or anon-resident is subject to taxation in Brazil, regardless of whether thedisposal occurs outside or within Brazil. This provision results in theimposition of income tax on the gains arising from a disposition of ourpreferred shares or 

 

13

----

Table of Contents

 

commonshares by a non-resident of Brazil to another non-resident of Brazil. There isno judicial guidance as to the application of Law No. 10,833 and,accordingly, we are unable to predict whether Brazilian courts may decide thatit applies to disposals of our Preferred ADSs and Common ADSs betweennon-residents of Brazil. However, in the event that the disposal of assets isinterpreted to include a disposal of our Preferred ADSs and Common ADSs, thistax law would accordingly result in the imposition of withholding taxes on thedisposal of our Preferred ADSs and Common ADSs by a non-resident of Brazil toanother non-resident of Brazil.

 

*Exchanging Preferred ADSs or Common ADSs for underlying shares may haveunfavorable consequences.*

 

TheBrazilian custodian for the preferred shares and common shares must obtain anelectronic certificate of foreign capital registration from the Central Bank toremit U.S. dollars abroad for payments of dividends, any other cashdistributions, or upon the disposition of the shares and sales proceeds relatedthereto. If you decide to exchange your Preferred ADSs or Common ADSs for theunderlying shares, you will be entitled to continue to rely, for five businessdays from the date of the exchange, on the depositary bank’s electroniccertificate of registration in order to receive any proceeds distributed inconnection with the shares. Thereafter, you may not be able to obtain and remitU.S. dollars abroad upon the disposition of the shares, or distributionsrelating to the shares, unless you obtain your own certificate of registrationunder CMN Resolution No. 2,689 of January 26, 2000, which entitlesforeign investors to buy and sell on the Brazilian stock exchanges. If you donot obtain this certificate, you will be subject to less favorable taxtreatment on gains with respect to the preferred or common shares. If youattempt to obtain your own certificate of registration, you may incur expensesor suffer significant delays in the application process. Obtaining acertificate of registration involves generating significant documentation,including completing and filing various electronic forms with the Central Bankand the *Comissão de Valores Mobiliários*(the Brazilian securities regulatory body), or the CVM. In order to completethis process, the investor will usually need to engage a consultant or attorneywho has expertise in Central Bank and CVM regulations. Any delay in obtainingthis certificate could adversely impact your ability to receive dividends ordistributions relating to the preferred shares or common shares abroad or thereturn of your capital in a timely manner. If you decide to exchange yourpreferred shares or common shares back into Preferred ADSs or Common ADSs,respectively, once you have registered your investment in the preferred sharesor common shares, you may deposit your preferred shares or common shares withthe custodian and rely on the depositary bank’s certificate of registration,subject to certain conditions. See “Item 10. AdditionalInformation—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.

 

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

 

Investingin Latin American securities, such as the preferred shares, common shares,Preferred ADSs or Common ADSs, involves a higher degree of risk than investingin securities of issuers from countries with more stable political and economicenvironments and such investments are generally considered speculative innature. These investments are subject to certain economic and political risks,such as, among others:

 

·                                          changes to the regulatory, tax, economic and political environment thatmay affect the ability of investors to receive payment, in whole or in part,with respect to their investments; and

 

·                                          restrictions on foreign investment and on repatriation of capitalinvested.

 

TheBrazilian securities market is substantially smaller, less liquid, moreconcentrated and more volatile than major securities markets in the UnitedStates. This may substantially limit your ability to sell the shares underlyingyour Preferred ADSs or Common ADSs at a price and time at which you wish to doso. The BM&FBovespa, the only stock exchange in Brazil upon which sharesare traded, had a market capitalization of approximately R$2.33 trillion as ofDecember 31, 2009 and an average daily trading volume of approximatelyR$5.38 billion for 2009. In comparison, the operating companies listed on theNew York Stock Exchange, Inc., or the NYSE, had a market capitalization ofapproximately US$12.9 trillion as of December 31, 2009 and an averagedaily trading volume of approximately US$69.7 billion for 2009.

 

*Shareholders may receive reduced dividend payments if our net incomedoes not reach certain levels.*

 

Underour by-laws, we must pay our shareholders a mandatory annual dividend equal toat least 50% of our net income for the preceding fiscal year, based on ourfinancial statements prepared in accordance with the accounting practicesadopted in Brazil, with holders of preferred shares having priority of payment.Our by-laws also require that the mandatory 

 

14

----

Table of Contents

 

annualdividend we pay to holders of our preferred shares equal a least the greater of10% of the par value of our shares or 3% of the net worth value of our shares,should the payment based on 50% of our net income not surpass this amount. Ifwe do not have net income or our net income is insufficient in a fiscal year,our management may recommend at the annual shareholders’ meeting in respect ofthat year that the payment of the mandatory dividend should not be made.However, under the guarantee of the State Government, our controllingshareholder, a minimum annual dividend of 6% of par value would in any event bepayable to all holders of common shares and preferred shares issued up toAugust 5, 2004 (other than public and governmental holders) in the eventthat mandatory distributions were not made for a fiscal year. See “Item 8.Financial Information—Dividend Policy and Payments” for a more detaileddiscussion.

 

*Holders of the Preferred ADSs and Common ADS and holders of our sharesmay have different shareholders’ rights than holders of shares in U.S.companies.*

 

Ourcorporate governance, disclosure requirements and accounting standards aregoverned by our by-laws, by the Level 1 Differentiated Corporate GovernancePractices of the BM&FBovespa, and by the Brazilian Corporate Law, which maydiffer from the legal principles that would apply if we were incorporated in ajurisdiction in the United States, such as Delaware or New York, or in otherjurisdictions outside Brazil. In addition, the rights of an ADS holder, whichare derivative of the rights of holders of our common or preferred shares, asthe case may be, to protect their interests against actions by our board ofdirectors and controlling shareholders are different under Brazilian CorporateLaw than under the laws of other jurisdictions. Rules against insidertrading and self- dealing and the preservation of shareholder interests mayalso be different in Brazil than in the United States, potentiallydisadvantaging holders of the preferred shares, common shares, Preferred ADSsand Common ADSs.

 

*The sale of a significant number of our shares or the issuance of newshares may materially and adversely affect the market price of our shares,Preferred ADSs and Common ADSs.*

 

Salesof a substantial number of shares or the perception that such sales could takeplace could adversely affect the prevailing market price of our shares, thePreferred ADSs and the Common ADSs. As a consequence of the issuance of newshares or sales by existing shareholders, the market price of our shares and,by extension, the Preferred ADSs and Common ADSs, may decrease significantly.

 

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

 

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

 

**Item 4.****        ****Information on the Company**

 

**Organization and Historical Background**

 

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

 

In order to comply with legal andregulatory provisions pursuant to which we were required to unbundle ourvertically integrated businesses, in 2004 we incorporated two wholly-ownedsubsidiaries of CEMIG—Cemig Geração eTransmissão S.A., referred to as Cemig Generation and Transmission, andCemig Distribuição S.A.,referred to as Cemig Distribution. CemigGeneration and Transmission andCemig Distribution were createdto carry out the activities of electricity generation and transmission, anddistribution, respectively. Except as set forth below, this process issubstantially complete.

 

Since December 31, 2009 thefollowing significant changes in the Company’s holdings in other companies havetaken place: (a) increase in the Company’s equity interest in Light S.A.,through acquisition of the interest held by Andrade 

 

15

----

Table of Contents

 

Gutierrez Concessões (“AGC”); and (b)increase in the equity interest in Terna, through acquisition of shares held byminority stockholders who accepted the public offer to purchase such shares.For information of stockholding changes prior to December 31, 2009, see “Item7. Major Shareholders and Related Party Transactions - Principal Shareholders”.

 

The following chart shows our corporate structure as of June 11,2010.

 

16

----

Tableof Contents

 

 

17

----

Tableof Contents

 

Thefollowing are our principal subsidiaries, consolidated in our financialstatements as of and for the year ended December 31, 2009:

 

·                                          Cemig Generation and TransmissionS.A. (100% interest) engages in electricity generation and transmission and hasbeen in operation since January 1, 2005.

 

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

 

·                                          Sá Carvalho S.A. (100% interest) produces and sells electricity, holdingthe concession to operate the Sá Carvalho hydroelectric power plant, withinstalled capacity of 78 MW. The plant started operating in 1951, and itsconcession expires in December 2024 but can be extended for a period of upto 20 years. CEMIG acquired control of Sá Carvalho S.A. from Acesita S.A. inDecember 2000.

 

·                                          Rosal Energia S.A. (“Rosal Energia”) (100% interest) produces and sellselectricity, holding the concession to operate the Rosal hydroelectric powerplant, with installed capacity of 55 MW. Its concession expires inMay 2032 but can be extended for a period of up to 20 years.  The company was formed in October 1999and the plant began operating on December 30, 1999. CEMIG acquired 100% ofthe shares of Rosal Energia from the Grupo Rede in December 2004.

 

·                                          Usina Térmica Ipatinga S.A. (100% interest) is a special-purpose companyproducing and selling electricity at the Ipatinga thermoelectric and steampower plant, with installed capacity of 40 MW. This company was formed inAugust 2000, began operating in 1986, and is on loan, withoutconsideration, to CEMIG, for 15 years, until December 2014.

 

·                                          Horizontes Energia S.A. (100% interest) produces and sells electricityas an independent power producer, or IPP, at the Machado Mineiro and Salto doParaopeba hydroelectric power plants, in the State of Minas Gerais, and theSalto Voltão and Salto do Passo Velho hydroelectric plants in the State ofSanta Catarina, with total installed capacity of 14.1 MW. Their concessionsexpire on October 4, 2030, except Machado Mineiro which expires on July 8,2025. The company was formed in April 2001 and the plants began operatingin 1992, 1992, 2001 and 2001, respectively.

 

·                                          Usina Termelétrica Barreiro S.A. (100% interest) is an IPP producing andselling energy from the Barreiro thermoelectric power plant, with installedcapacity of 12.9 MW. The company was formed in April 2001 and beganoperating in February 2004 with its authorization extending until 2023.

 

·                                          Central Termelétrica de Cogeração S.A.(100% interest) operated theBarreiro thermoelectric power plant but is now a non-operational company, sinceoperation of the plant was subsequently transferred to Usina TermelétricaBarreiro S.A. Central Termelétrica de Cogeração S.A. was formed inJuly 2002.

 

·                                          CemigPCH S.A. (100% interest) is an IPP operating the 23MW Pai Joaquim small hydroplant and selling the electricity produced. The company was formed inOctober 2001 and began operating in March 2004 under an authorizationthat expires in April 2032.

 

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

 

·                                          CemigCapim Branco Energia S.A. (100% interest) operates the two-plant Capim Brancogenerating complex, through the Capim Branco Energia Consortium. The complex,renamed the Amador Aguiar Complex, has potential total installed capacity of450 MW. The company was formed in May 2001 and the Capim Branco I plantbegan operating in February 2006, and Capim Branco II in March 2007.The concession runs until August 2036.

 

·                                          CemigBaguari Energia S.A. (100% interest) is CEMIG’s vehicle for participation inthe Baguari Hydro Plant consortium, operating the Baguari Hydro Plant. Thiscompany was formed in July 2006 and CEMIG later decided to take part inthe consortium through the company Baguari Energia S.A.

 

·                                          CemigTrading S.A. (100% interest) provides services related to the sale and tradingof electricity in the Brazilian electricity sector, such as evaluation ofscenarios, representation of clients in the CCEE, structuring and 

 

18

----

Table of Contents

 

intermediation of electricity purchase and saletransactions, and consultancy and advisory services. It also buys and sellselectricity in the Free Market to meet the needs of its clients. It was createdin July 2002.

 

·                                          Efficientia S.A. (100% interest) provides electricity efficiency andoptimization services, consultancy and solutions, and also operating andmaintenance services to electricity supply facilities.  The company was formed in January 2002.

 

·                                          CemigTelecomunicações S.A. (100% interest) provides telecommunications and relatedservices, through multiservice networks using fiber optic cable, coaxial cableand other electronic equipment.  Cemig Telecomunicações S.A. was formed in January 1999 as Empresa de InfoviasS.A. In 2002, CEMIG acquired a stake in such company  held by AES.

 

·                                          CemigServiços S.A. (100% interest) was formed in April 2008 to provide servicesrelated to generation, transmission and distribution of electric power.

 

Ourconsolidated financial statements for the years ended  December 31, 2009, 2008 and 2007 includethe financial results of CEMIG and all its subsidiaries (operational andpre-operational) described above.  SeeNotes 1 and 9 to the consolidated financial statements. At December 31,2009, the following investments were not consolidated:

 

·                                          Light S.A. (13.03% interest in its total capital) The main holdings ofLight S.A. are Light Energia, a generator of electricity, Light Serviços deEletricidade S.A., an electricity distributor, and Light Esco Ltda., whichoperates in energy trading and energy efficiency. For further details, pleasesee “Investment in Light.”

 

·                                          Companhia de Gás de MinasGerais (“Gasmig”) (jointly controlled, 55.19% interest) acquires,transports, distributes and sells natural gas. Gasmig was formed inJuly 1986 and in December 2004, CEMIG sold 40% of its interest inGasmig to Gaspetro, a wholly owned subsidiary of Petrobras, and entered into aStockholders’ Agreement with, Petrobras and Gaspetro. Gasmig holds a concessionfor distribution of piped gas throughout the state of Minas Gerais  for a period of 30 years beginning inJanuary 1993, and this period may be extended.

 

·                                          Empresa Paraense de Transmissão de Energia S.A. (“ETEP”) (jointlycontrolled, 40.19% interest) is the holder of a public service electricitytransmission concession for the transmission line originating at the TucuruíSubstation and ending at the Vila do Conde Substation in the State of Pará.ETEP was formed in March 2001 and CEMIG acquired its interest in ETEP inAugust 2006.

 

·                                          Empresa Norte de Transmissão de Energia S.A. (“ENTE”) (jointlycontrolled, 36.69% interest) is the holder of a public service electricitytransmission concession for two 500-kV transmission lines, the first from theTucuruí Substation to the Marabá Substation in the State of Pará, and thesecond from the Marabá Station to the Açailândia Substation in the State ofMaranhão. ENTE was formed in September 2002 and CEMIG acquired itsinterest in ENTE in August 2006.

 

·                                          Empresa Regional de Transmissão de Energia S.A. (“ERTE”) (jointlycontrolled, 36.69% interest) is the holder of a public service electricitytransmission concession for the 230-kV transmission line from the Vila do CondeSubstation to the Santa Maria Substation in the State of Pará. ERTE was formedin September 2002 and CEMIG acquired its interest in ERTE inAugust 2006.

 

·                                          Empresa Amazonense de Transmissão de Energia S.A. (“EATE”) (jointlycontrolled, 36.35 % interest) is the holder of the public service electricitytransmission concession for the 500-kV transmission lines between thesectionalizing substations of Tucuruí, Marabá, Imperatriz, PresidenteDutra and Açailândia. EATE was formed in March 2001, and CEMIG acquiredits interest in EATE in August 2006.

 

·                                          Empresa Catarinense de Transmissão de Energia S.A. (“ECTE”) (jointlycontrolled, 13.37% interest) is the holder of the public service electricitytransmission service concession for the 525-kV transmission line from theCampos Novos Substation to the Blumenau Substation in the State of SantaCatarina. ECTE was formed in August 2000, and CEMIG acquired its interestin ECTE in August 2006.

 

·                                          Companhia de Transmissão Centroeste de Minas (jointly controlled, 51.0%interest) engages in building, implementing, operating and maintaining the345-kV transmission line from the substation of the Furnas hydroelectric powerplant to a substation located in Pimenta. Companhia de Transmissão Centroestede Minas was formed in October 2004 and the period of the concession forthe Furnas—Pimenta transmission line is 30 years, beginning in March 2005.

 

19

----

Tableof Contents

 

·                                          Companhia Transleste de Transmissão (jointly controlled, 25.0% interest)built and operates the 345-kV transmission line connecting a substation inMontes Claros to the substation of the Irapé hydroelectric power plant. Thiscompany was formed in October 2003 and began operating inDecember 2005. The concession period of the Irapé-Montes Clarostransmission line is 30 years, beginning in February 2004.

 

·                                          Companhia Transudeste de Transmissão (jointly controlled, 24.0%interest) built, operates and maintains the 345-kV transmission line fromItutinga to Juiz de Fora. Companhia Transudeste de Transmissão was formed inOctober 2004 and began operating in February 2007. The period of theconcession for the Itutinga—Juiz de Fora transmission line is 30 years, beginningin March 2005.

 

·                                          Companhia Transirapé de Transmissão (jointly controlled, 24.5% interest)built, operates and maintains the 230-kV Irapé—Araçuaí transmission line.Companhia Transirapé de Transmissão was formed in December 2004 and beganoperating in May 2007.  The periodof the concession for the transmission line is 30 years, beginning inMarch 2005.

 

·                                          Empresa Brasileira de Transmissão de Energia S.A.**(“EBTE”)(jointly controlled, 49% interest) was formed in July 2008 as aspecial-purpose company to build, operate and maintain 481.6 miles oftransmission lines: the 144.16 mile, 230kV, double-circuit Brasnorte—Jubatransmission line; the 65.87 mile double-circuit Brasnorte—Parecis transmissionline; the 133.59 mile double-circuit Brasnorte—Juína transmission line, the 90.10mile single-circuit Nova Mutum—Sorriso transmission line, and the 47.85 mile,230kV, single circuit Sorriso—Sinop transmission line, and the Parecis andJuína 230/138/13.8 kV substations, to transmit hydroelectrically generatedelectricity from the Dardanelos and Juruena complexes and strengthen theregional transmission system. Partial operational startup is planned for September 2010.

 

·                                          Transchile Charrúa Transmisión S.A. (jointly controlled, 49% interest)is engaged in building, operating and maintaining the 220 kV Charrúa—NuevaTemuco transmission line in Chile. Transchile Charrúa Transmisión S.A. wasformed in July 2005.  The period ofthe concession for the line is 20 years, beginning in May 2005, and it maybe extended for an equal period. Its commercial operation began in January 2010.

 

·                                          Baguari Energia S.A. (jointly controlled, 69.39% interest) is aspecial-purpose company formed in April 2008 to operate the electricitygeneration concession of the Baguari power plant (140 MW), through the BaguariAHE Consortium, in which CEMIG has a 49% interest. The period of the concessionis 35 years, beginning in August 2006. The first and the second generationunits started operating on September 9, 2009, and November 26, 2009 ,respectively. The third generation unit started operating on March 2, 2010and the last generation unit started operating on May 19, 2010.

 

·                                          Hidrelétrica Cachoeirão S.A. (jointly controlled, 49% interest) builtand operates the Cachoeirão small hydro plant (PCH) , on the Manhuaçu River, inthe municipalities of Pocrane and Alvarenga, in the State of Minas Gerais, withinstalled capacity of 27 MW. Hidrelétrica Cachoeirão S.A. was formed inJanuary 2007 and began operating in December 2008. Its concessionperiod is 30 years, beginning in July 2000.

 

·                                          Hidrelétrica Pipoca S.A. (jointly controlled, 49% interest) is engagedin building, operating and selling electricity generated by the Pipoca powerplant on the Manhuaçu River, in the municipalities of Caratinga andIpanema.  Hidrelétrica Pipoca S.A. wasformed in June 2004 and CEMIG acquired its interest in May 2008. Theplant has installed capacity for 20 MW, with startup of the first generationunit planned for August 2010. The second and the third generation unitsare expected to start their operations in September 2010 and in October 2010,respectively. Its authorization period is 30 years, beginning inSeptember 2001.

 

·                                          Guanhães Energia S.A. (jointly controlled, 49% interest) is engaged inbuilding and operating the Dores de Guanhães, Senhora do Porto and Jacaré smallhydro plants in the municipality of Dores de Guanhães, and the Fortuna II plantin the municipalities of Guanhães and Virginópolis, with aggregate capacity of44 MW. Guanhães Energia S.A. was formed in June 2006 and CEMIG acquiredits interest in October 2007. Construction is planned to begin in 2010, and operational startup is plannedfor the first half of 2012.  Itsauthorization period is 30 years, beginning in 2001 for Fortuna II, October 2002for Jacaré and Senhora do Porto unit, and November 2002 for Dores deGuanhães.

 

·                                          Madeira Energia S.A.(“MESA”) (jointly controlled, 10% interest) is aspecial-purpose company, formed in August 2007 to build, operate andmaintain the Santo Antônio hydroelectric plant, through its wholly owned

 

20

----

Table of Contents

 

subsidiary Santo Antônio Energia S.A.(“SAESA”).The plant is being built in the basin of the Rio Madeira, in the Northernregion of Brazil. It will have generating capacity of 3,150 MW and is expectedto start operating in 2012. Its concession period runs for 35 years, beginningin June 2008.

 

·                                          Central Eólica Praias de Parajurú S.A. (jointly controlled, 49%interest) is located in the county of Beberibe, in the State of Ceará, 63 milesfrom the state’s capital, Fortaleza. Started commercial operation in August 2009.All the electricity, totaling 106,604 MWh/year, has been sold to Eletrobras,under the Program to Encourage Alternative Sources of Electricity (“ProinfaProgram”) for a period of 20 years.

 

·                                          Central Eólica Praia do Morgado S.A. (jointly controlled, 49%interest)  is located in the county ofAcaraú, in the State of Ceará, 174 miles from the State’s capital, Fortaleza.It started operating in May 2010. All the electricity, totaling 115,636MWh/year, has been sold to Eletrobras, under the Proinfa Program for a periodof 20 years.

 

·                                          Central Eólica Volta do Rio S.A. (jointly controlled, 49% interest) islocated in the county of Acaraú, in the State of Ceará, 149 miles from theState’s capital, Fortaleza, is expected to start operation in July 2010.All the electricity, totaling 161,238 MWh/year, has been sold to Eletrobras,under the Proinfa Program for a period of 20 years.

 

·                                          Axxiom Soluções Tecnológicas S. A. (49% interest) provides completeservices of systems implementation and management to electricity sectorcompanies (generation, transmission and distribution).  Axxiom Soluções Tecnológicas S. A. was formedon August 27, 2007 and began operating in the second half of 2008.

 

OnJuly 3, 2008, CEMIG’s Board ofDirectors authorized Cemig Generation andTransmission to acquire a 49% stake in the Itaocara Hydroelectric Power Plantand the Paracambi and Lajes Small Hydroelectric Power Plants and to join, bycontract: the UHE Itaocara Consortium, in partnership with Itaocara EnergiaLtda.; the PCH Paracambi Consortium, in partnership with Lightger Ltda.; andthe PCH Lajes Consortium, in partnership with Light Energia S.A.  The objective of each consortium is toproduce technical and economic feasibility studies and to plan, build, operateand maintain the respective power plants.

 

TheLajes Small Hydro Plants are still at the planning and feasibility studystages.

 

OnFebruary 4, 2009, Cemig Generation and Transmission’s Board of Directorsauthorized the offering of a binding proposal for a share purchase agreementto  Energimp S.A. to purchase a 49%interest in three wind farms located in the State of Ceará, Brazil for R$213million. The transaction was completed on August 15, 2009, for R$223million.

 

Thewind farms acquired include the Praias de Parajurú Wind Farm, which startedoperating in August 2009, the Praia do Morgado Wind Farm, which startedoperating in May 2010, and the Volta do Rio Wind Farm, which is expectedto begin operating in July 2010, with a total installed capacity of 99.6MW.  The acquisitions were approved byANEEL, the Federal Savings Bank (Caixa Econômica Federal), Eletrobras, and theantitrust authority CADE (Conselho Administrativo de Defesa Econômica).

 

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

 

OnDecember 31, 2009, we generatedelectricity at 54 hydroelectric plants, three thermoelectric plants and twowind farms and had a total installed capacity of 6,624 MW. At the same date, we owned and operated 3,085 miles of transmission linesand 281,756 miles of distribution lines. We hold concessions to distributeelectricity in 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 distributionbusinesses have been and will continue to be subject to increased competition.For a more detailed description of regulatory changes that affect our business.See “Item 5. Operating and Financial Reviewand Prospects” and “The Brazilian Power Industry.”

 

21

----

Tableof Contents

 

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, we created Gasmig as a subsidiary toundertake the distribution of natural gas through pipelines located in MinasGerais, of which we sold a40% stake in 2004.

 

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 ForçaEmpreendimentos Ltda., part of the AES Corporation Group. In 2002, we purchased AES Força Empreendimentos Ltda.’sinterest in Empresa de Infovias S.A.(currently CEMIG TelecomunicaçõesS.A.).  We also provide consultingservices and have entered into consulting agreements with electricity companiesin several countries.

 

**Acquisitionof Terna**

 

Underits strategic business plan, CEMIG has the objective of expanding its marketshare in the Brazilian electricity sector. For this purpose it has for sometime been studying the acquisition of investments in distribution, generationand transmission businesses.

 

Inthis context, on April 23, 2009, Cemig Generation and Transmission signeda share purchase agreement with the Italian company Terna S.p.A. in relation tothe shares in the transmission holding company Terna Participações S.A. (“Terna”).This transaction was completed on November 3, 2009 through Transmissora doAtlântico de Energia Elétrica S.A. (“Atlântico”), a company formed by CemigGeneration and Transmission, owning 49%, and Fundo de Investimento emParticipações Coliseu (“FIP Coliseu”), owning 51%.

 

Thetotal number of shares acquired by Atlântico was 173,527,113 common shares,representing 65.85% of the registered capital and 85.26% of the voting stock ofTerna, for a price of R$2,148,379,099.24, corresponding to R$37.14 per unit(each unit comprises one common share and two preferred shares), and R$12.38for each common or preferred share. On November 4, 2009, the name of TernaParticipações S.A. was changed to Transmissora Aliança de Energia Elétrica S.A.(“Aliança”).

 

Inone of the agreements that regulate the partnership of Cemig Generation andTransmission with FIP Coliseu in the acquisition of the shares in Terna held byTerna Rete Elettrica Nazionale S.p.A (“Terna S.p.A”), there is a provision inwhich Cemig Generation and Transmission has granted FIP Coliseu the right tosell all of its interest in Aliança to Cemig Generation and Transmission, inthe fifth year after its entry, upon payment of the amounts of capital investednet of the dividends and benefits received by FIP Coliseu in the acquisition ofTerna adjusted by the variation in the IPCA inflation index +7% p.a.

 

Aliançais a holding company which operates in electricity transmission in 11 states ofBrazil through the following companies which it controls or in which it hasstockholding interests: Transmissora Sudeste Nordeste S.A. (“TSN”); NovatransEnergia S.A.; Empresa de Transmissão de Energia do Oeste S.A. (“ETEO”); Empresade Transmissão do Alto Uruguai S.A. (“ETAU”) (holding 52.58% of the registeredcapital); Brasnorte Transmissora de Energia S.A. (holding 38.67% of theregistered capital) and Terna Serviços Ltda. Together, these companies hold anaggregate 2,307 miles of transmission lines, comprising component parts of theBrazilian National Electricity Transmission Grid.

 

OnDecember 28, 2009, Atlântico was split, and the majority of it wasincorporated by Aliança, being the separated part of net assets and liabilitiestransferred to Transmissora Alterosa de Energia S.A. (“Alterosa”), whichassumed the obligations in relation to the public offering to acquire shares inAliança, with the purpose to give minority stockholders the same terms in thesale of shares. After the incorporation, Cemig Generation and Transmission andFIP Coliseu directly held, respectively, 32.27% and 33.59% of the registeredcapital, and 41.78% and 43.48% of the voting stock, of Aliança.

 

Thepublic offer to purchase shares was settled on May 11, 2010: 25,841,774units were purchased, representing 25,841,774 common shares and 51,683,548preferred shares, at the price of R$38.73 per unit or R$12.91 per common shareor preferred share, a total financial volume of R$1 billion. With thetransaction, Cemig Generation and Transmission and FIP Coliseu, throughAlterosa, increased their interest in the total capital of Aliança by 29.42 %,comprising 12.69% of common shares  and86.17% of preferred shares.

 

Asa result of the public offer, Cemig Generation and Transmission and FIP Coliseunow hold an aggregate of 95.28% of the total capital of Aliança, namely 97.96%of its common shares and 86.17% of its preferred shares, with a totalinvestment of R$3,149 million, of which Cemig investments represent R$1,884million.

 

22

----

Table of Contents

 

**Investment in Light**

 

OnDecember 31,2009, through Rio Minas Energia Participações S.A. (“RME”), weheld an indirect 13.03% interest in Light S.A., or Light, which generates,transmits and distributes electricity in the state of  Rio de Janeiro. On March 28, 2006, RMEsigned an agreement with EDF International S.A., or EDFI, to purchase from EDFI88.84% of its shares of Light, which represented 79.39% of the total registeredcapital of Light at the time of the purchase.

 

OnMay 16, 2007, the Brazilian Development Bank, or BNDES, which heldconvertible debentures issued by Light, exercised its option and converted 90%of the convertible debentures into shares. As a result of this conversion,representing approximately R$713 million, BNDES became the holder of31.44% of the total capital of Light, thereby reducing the equity interestholding of RME from 79.39% to 54.17%. On October 26, 2007, BNDES convertedthe remaining 10% of its convertible debentures into shares of Light, and as aresult held 33.69% of the total capital of Light, diluting RME’s percentageholding in Light from 54.17% to 52.25% (2.7% through its wholly ownedsubsidiary Lidil Comercial Ltda.).

 

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

 

OnDecember 30, 2009, the stockholders of RME approved a stockholdingreorganization based on a partial split of the company into equal parts,resulting in CEMIG and Andrade Gutierrez Concessões (“AGC”) holding adirect  interest in Light S.A. (“Light”),after the transaction,  while Luce BrasilFundo de Investimento em Participações (“LUCE”), through Luce Empreendimentos eParticiações S.A. (“LEPSA”), and Equatorial Energia S.A. (“Equatorial”),through the remaining portion of RME, kept their respective indirect interests.

 

OnDecember 30, 2009, CEMIG, as purchaser, entered into share purchaseagreements with AGC and Fundo de Investimento em Participações PCP (FIP PCP),the controlling stockholder of Equatorial, in relation to their respectivedirect and indirect stockholdings in Light. Under the provisions of these SharePurchase Agreements, the amounts were to be adjusted by the InterbankCertificates of Deposit (“CDI”) rate, published by Cetip S.A. Balcão Organizadode Ativos e Derivativos (the Securities Custody and Financial SettlementCenter), from December 1, 2009 up to the date of closing of eachtransaction, less the dividends paid or declared in the period. Under theprovisions of these Share Purchase Agreements, completion of the agreementsigned with FIP PCP is conditional on a stockholding restructuring ofEquatorial, which is the direct holder of the shares that are the subject ofthe transaction, and should take place in July 2010.

 

Theshare purchase agreement with AGC corresponds to 13.03% of the voting and totalstock of Light. The price of the acquisition, corresponding to 26,576,149common shares in Light, was R$785 million, equivalent to approximately R$29.54per share. On March 25, 2010, CEMIG paid R$718.5 million to AGC,corresponding to 25,494,500 shares, or 12.50% of the capital, equivalent toR$28.18 per share. Completion of the remainder of the transaction, for1,081,649 shares, or 0.53% of the capital, is planned for September 2010.

 

Theshare purchase agreement with FIP PCP was entered into in connection with theacquisition of 55.41% of the indirect stockholding held by FIP PCP, thecontrolling stockholder of Equatorial, in Light.  This interest consists of 14,728,502common shares in Light, equivalent to 7.22% of the voting and totalcapital of Light. For this transaction to be completed, Equatorial will undergoa reorganization to separate out the indirect holding in Light to a new company(“Newco”). After that, FIP PCP will sell its indirect interest in Light,through Newco to a special purpose company in which CEMIG will hold an interestof not less than 20%. The price of this acquisition is R$29.54 pershare in Light, corresponding to R$435.0 million, for 55.41% of theindirect interest in Light currently held by FIP PCP. If the minoritystockholders of Newco exercise their “tag-along” rights, the value of thetransaction could potentially reach a total of R$785 million, corresponding tothe total of 26,576,149 common shares in Light that Newco will holdindirectly, representing approximately 13.03% of the total and votingcapital of Light.

 

Inconnection with the Share Purchase Agreements, on March 24, 2010, CEMIGentered into an option contract for sale of shares and other matters (“the PutOption”) with Enlighted Partners Venture Capital LLC, a limited liabilitycompany, the object of which is the grant of an option to sell the share unitsof Luce Investment Fund (“LUCE Fund”), which owns 75% of the share units in

 

23

----

Table ofContents

 

LUCE,which in turn is the indirect holder, through LEPSA, of 26,576,149 commonshares in Light, representing approximately 13.03% of the total and votingcapital of Light.

 

Theprice of the share units of LUCE Fund, in the event of the Put Option beingexercised, is US$340.5 million on December 1, 2009, less any dividends orinterest on capital paid or declared from December 1, 2009 up to theexercise of the Put Option, if it is exercised.

 

ThePut Option may be exercised from October 1 through October 6, 2010and its exercise shall create an obligation upon CEMIG to acquire or indicate athird party that shall acquire the totality of the share units of LUCE Fund.

 

CEMIG’stotal interest in Light will depend on its interest in a special purposecompany, whether minority shareholders exercise their tag-along rights andwhether the Put Option is exercised.

 

Werecognize our interest in Light as an investment and we recorded R$132 millionin income from our investment in Light in 2009.

 

*Light’sActivities*

 

Themain activities of Light are:

 

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

 

·                  Distribution of electricity—serving a totalarea of 4,236 square miles of the State of Rio de Janeiro, supplyingelectricity to 4.0 million consumers, representing approximately 11 millionpeople in 31 municipalities and invoicing a total of 19,084 GWh in 2009.

 

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

 

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

 

Lightinvested a total of R$ 563.8 million in 2009 in the acquisition of fixedassets, improvements to and expansion of its distribution system andtransmission network for generating facilities. This amount represented a 3.13%increase  over the R$546.7 million ofcapital expenditures in 2008.

 

Light’sconcession agreement to provide electricity generation, distribution andtransmission services in the State of Rio de Janeiro expires on June 4,2026 but may be renewed upon application.

 

**Transmission Concession Holders**

 

In2006, CEMIG, in partnership with MDU Brasil Ltda. and Brascan Brasil Ltda.,acquired 50% ownership of the voting stock of the electricity transmissionconcession holders EATE, ENTE, ETEP, and ERTE, and 40% of the voting stock ofthe transmission concession holder ECTE, for R$802 million. Together, we referto the companies as the Brazilian Power Transmitters (*TransmissorasBrasileiras de Energia*) (“TBE”).

 

OnSeptember 24, 2008 Brookfield Brasil TBE Participações Ltda., CEMIG’s partner in TBE,  exercised the option to sell its shares inthe companies EATE, ECTE, ENTE, ERTE and ETEP to CEMIG, AluparInvestimento S. A. (“Alupar”) and Centrais Elétricas de Santa Catarina (“Celesc”).  Jointly with Alupar and Celesc, CEMIG acquired the shares formerly owned byBrookfield in the transmission companies of the TBE Group.  TBE Group consists of EATE, ENTE, ETEP, ECTE,ERTE, STC, Lumitrans, EBTE and ESDE.  On June 30,2009, CEMIG acquired 95%of the shares owned by Brookfield in EATE, ENTE, ERTE, and ETEP, and 74.5% ofthe shares owned by Brookfield in ECTE, for an amount corresponding to R$479.9million. Subsequently, on July 14, 2009, an additional 4.9% of Brookfield’sshares in EATE, ENTE, ERTE and ETEP, and 3.8% of Brookfield’s shares in ECTE,owned by Brookfield, were acquired for R$25.0 million.  The total expenditure was R$504.9 million.

 

InOctober 2008, EATE acquired an 80% interest in the companies Sistemas deTransmissão Catarinense S.A. (“STC”) and Lumitrans — Companhia Transmissora deEnergia Elétrica, both located in Santa Catarina, adding R$32 million inPermitted Annual Revenue (“RAP”), and 122 miles of network, to the TBE Group.

 

Alsoin 2008, EATE, jointly with CemigGeneration and Transmission, won ANEEL Auction 004/2008, Lot D, for theconstruction, operation and maintenance of five legs of transmission line (482miles), involving seven substations (400MVA), in Mato 

 

24

----

Table of Contents

 

Grosso,for RAP of R$27 million. The company EBTE was contracted to operate theproject, with EATE owning 51% of the capital and CemigGeneration and Transmission owning 49%.

 

InMay 2009, at ANEEL Auction 001/2009, ETEP was awarded Lot H, for theconstruction, operation and maintenance of the 345kV Santos Dumont substation,in Minas Gerais, for RAP of R$8 million. In June 2009, Empresa SantosDumont de Energia S.A. (“ESDE”) was contracted to operate the project.

 

*Description of the transmission concession holders*

 

OnDecember 31, 2009, CEMIG had directinvestments (jointly controlling) in EATE, ECTE, ENTE, ERTE, ETEP and EBTE, andindirect investments in STC, Lumitrans Companhia Transmissora de EnergiaElétrica, and ESDE as shown in the table below.

 
| **Company**   | ** ** | **Connection**                                                                               | ** ** | **Length  (Miles)** | ** ** | **Capacity  (kV)** | ** ** | **Operation**                                     | ** ** | **Annual Permitted Revenue (1)  (R$million)** | ** ** | **Concession contract (3)** | ** ** | **Concession  Expiration Date** |
|---------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|
| EATE (2)      |       | Tucuruí  (Pará) to Presidente Dutra (Maranhão)                                |       | 577                 |       | 500                |       | March/03                                          |       | 263.1                                         |       | June 12, 2001               |       | June 12, 2031              |
| ECTE (2)      |       | Campos  Novos (Santa Catarina) to Blumenau (Santa Catarina)                                  |       | 157                 |       | 525                |       | March/02                                          |       | 59.2                                          |       | November 1, 2000            |       | November 1, 2030           |
| ENTE (2)      |       | Tucuruí  (Pará) to Açailândia (Maranhão)                            |       | 285                 |       | 500                |       | February/05                                       |       | 136.6                                         |       | December 11, 2002           |       | December 11, 2032          |
| ERTE (2)      |       | Vila  do Conde (Pará) to Santa Maria (Pará)                                        |       | 96                  |       | 230                |       | September/04                                      |       | 24.1                                          |       | December 11, 2002           |       | December 11 2032           |
| ETEP (2)      |       | Tucuruí  (Parã) to Vila do Conde (Pará)                                       |       | 201                 |       | 500                |       | August/02                                         |       | 61.0                                          |       | June 12, 2001               |       | June 12, 2031              |
| Lumitrans (2) |       | Machadinho — Campos Novos                                                               |       | 31.7                |       | 525                |       | October/07                                        |       | 16.2                                          |       | February 18, 2004           |       | February 18, 2034          |
| STC (2)       |       | Barra Grande — Lajes- Rio  do Sul                                                       |       | 114.3               |       | 230                |       | November/07                                       |       | 23.5                                          |       | April 27, 2006              |       | April 27, 2036             |
| EBTE          |       | Brasnorte-Juba,Brasnorte-Parecis

Brasnorte- Juína,Nova  Mutum-Sorriso,

Sorriso- Sinop |       | 481.6               |       | 230                |       | Expected to start operating partially in June/10  |       | 27.3                                          |       | October 16, 2008            |       | October 16, 2038           |
| ESDE          |       | LT Barbacena 2- Santos Dumont 

LT Santos Dumont- Juiz de  Fora I                            |       | 1.2                 |       | 345                |       | Expected to start operating partially in May/2011 |       | 8.3                                           |       | November 19, 2009           |       | November 19, 2039          |

 

----

(1)                                Annual revenueset by ANEEL (Resolution 843/2009) and adjusted for inflation.

(2)                                The operationand maintenance of transmission lines of EATE, ENTE and ERTE are carried out byEletronorte-Centrais Elétricas do Norte do Brasil S.A. or Electronorte and ofECTE by Celesc and Eletrosul and of STC by Celesc and Lumitrans by Eletrosul.

(3)                                Right acquiredfor commercial operation of public electricity transmission services for 30 years,renewable for the same period of time.

 

Underthe concession contracts for these lines, the annual revenue in the last 15years of the contracts is 50% less than the annual revenue for the first 15years, though the annual revenue is adjusted each year for inflation inconnection with the transmission companies’ annual review. The annual reviewand revenue adjustment usually takes place in the month of July. We recognizerevenue on these contracts on a straight-line basis in accordance with thenature of the services provided.

 

*Acquisition of holdings in MDUand TBE*

 

OnNovember 13, 2009, CEMIG signed a sharepurchase agreement with MDU Resources Luxembourg II LLC, S.à.r.l. (“MDU”) foracquisition from MDU of 13.3% of the voting and total stock of ENTE, 13.3% ofthe voting and total stock of ERTE and up to 10% of the voting capital of ECTE,as approved by our Board of Directors on October 28, 2009

 

Theapproximate total value of the sale is R$100 million as of September 30,2009. The final amount depends on whether the shareholders will exercise theirright of first refusal.

 

25

----

Tableof Contents

 

Conclusionof the transaction and the actual acquisition of the shares by CEMIG is subject to approval by ANEEL, the BNDESand other financing agents.

 

Completionof the transaction will result in CEMIG having aweighted average holding in TBE of 46.6% of the common stock and 39.86% of thetotal stock. After the repurchase of the shares owned by Eletrobras, CEMIG’s holdings in the total stock and the commonstock will be equal at 46.8%.

 

**Capital Expenditures and Investments in Affiliates**

 

Capitalexpenditures and investments in affiliates for the years endedDecember 31, 2009, 2008 and 2007 in millions of *reais*,are as follows:

 
| ** **                                                          | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Acquisition of interest in Terna Participações S.A        |       | 1,070                                      |       | — |   | — |   |
| Acquisition of interests in transmission companies                  |       | 505                                        |       | 37 |   | — |   |
| Acquisition of interests in wind farms                              |       | 224                                        |       | — |   | — |   |
| Other investments                                                   |       | 215                                        |       | 183 |   | 26 |   |
| Sale of Way TV                                                      |       | —                                     |       | — |   | (49 | ) |
| Total investments in affiliates                                     |       | 2,014                                      |       | 220 |   | (23 | ) |
| Generation power projects—under property, plant  and equipment |       | 87                                         |       | 121 |   | 242 |   |
| Transmission network expansion                                      |       | 23                                         |       | 12 |   | 64 |   |
| Distribution network expansion                                      |       | 672                                        |       | 792 |   | 790 |   |
| Others                                                              |       | 69                                         |       | 46 |   | 24 |   |
| Total capital expenditures under property, plant  and equipment     |       | 851                                        |       | 971 |   | 1,120 |   |
| Total capital expenditures and investments in  affiliates           |       | 2,865                                      |       | 1,191 |   | 1,097 |   |

 

Wecurrently project capital expenditures in 2010 related to property, plant andequipment of approximately R$1,401 million. The principal uses of these capitalexpenditures are expected to be for the expansion of our distributioninfrastructure.

 

Wecurrently project investments in affiliates of approximately R$132 million in2010.

 

Weexpect to fund our capital expenditures and investments in affiliates in 2010mainly from our cash flow from operations and, to a lesser extent, throughfinancing. As the financial markets improve, we expect to finance our expansionand projects by issuing debentures as well as through commercial paper to meetshort term objectives.

 

**BusinessOverview**

 

*General*

 

Weare required, like other Brazilian electric utilities, to purchase electricityfrom the Itaipu Hydroelectric Power Plant in an amount determined by theFederal Government based on our electricity sales. See “—Distribution andPurchase of Electric Power—Purchase of Electric Power—Itaipu.” In addition, wepurchase energy from other concessionaires. See “—Distribution and Purchase ofElectric Power—Purchase of Electric Power—Auction Contracts.” We also purchaseenergy generated by self power producers, or SPPs, and independent powerproducers, or IPPs, 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:

 

26

----

Table ofContents

 

**CEMIG’SELECTRIC ENERGY BALANCE**

 
| ** **                                                   | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| **(GWh)**                                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| RESOURCES                                                    |       | 70,548                           |       | 68,318 |   | 67,698 |   |
| Electricity generated by CEMIG (1)                           |       | 32,830                           |       | 31,291 |   | 33,150 |   |
| Electricity generated by auto-producers                      |       | 1,167                            |       | 1,062 |   | 1,047 |   |
| Electricity generated by Ipatinga                            |       | 210                              |       | 355 |   | 362 |   |
| Electricity generated by Barreiro                            |       | 62                               |       | 75 |   | 82 |   |
| Electricity generated by Sá Carvalho                    |       | 428                              |       | 349 |   | 322 |   |
| Electricity generated by Horizontes                          |       | 79                               |       | 41 |   | 36 |   |
| Electricity generated by Cemig PCH                           |       | 3                                |       | 22 |   | 10 |   |
| Electricity generated by Rosal Energia                       |       | 309                              |       | 230 |   | 264 |   |
| Electricity generated by Amador Aguiar                       |       | 641                              |       | 610 |   | 505 |   |
| Electricity generated by Cachoeirão (5)                 |       | 148                              |       |   |   |   |   |
| Electricity bought from Itaipu                               |       | 8,889                            |       | 12,323 |   | 12,135 |   |
| Electricity bought from CCEE and other companies  (2)(3)     |       | 25,782                           |       | 21,960 |   | 19,785 |   |
|                                                         |       |                             |       |   |   |   |   |
| REQUIREMENTS                                                 |       | 70,548                           |       | 68,318 |   | 67,698 |   |
| Electricity delivered to final consumers (4)                 |       | 39,204                           |       | 42,940 |   | 39,056 |   |
| Electricity delivered to auto-producers                      |       | 996                              |       | 982 |   | 990 |   |
| Electricity delivered by Ipatinga                            |       | 211                              |       | 355 |   | 362 |   |
| Electricity delivered by Barreiro                            |       | 84                               |       | 98 |   | 100 |   |
| Electricity delivered by Sá Carvalho                    |       | 500                              |       | 473 |   | 472 |   |
| Electricity delivered by Horizontes                          |       | 79                               |       | 84 |   | 84 |   |
| Electricity delivered by Cemig PCH                           |       | 123                              |       | 122 |   | 122 |   |
| Electricity delivered by Rosal Energia                       |       | 263                              |       | 263 |   | 263 |   |
| Electricity generated by Cachoeirão (5)                 |       | 140                              |       |   |   |   |   |
| Electricity delivered to the CCEE and other  companies(2)(3) |       | 23,339                           |       | 17,211 |   | 20,621 |   |
| Losses                                                       |       | 5,609                            |       | 5,790 |   | 5,629 |   |

 

----

(1)                                Discounting thelosses attributed to generation (711 GWh in 2009) and the internal consumptionof the generating plants.

(2)                                Beginning in2004, this amount refers to contracts, purchases and sales of electricity underthe CCEE, including the Energy Reallocation Mechanism (*Mecanismo deRealocação de Energia*).

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

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

(5)                                Includes 100%of electricity produced by Cachoeirão Hydro Power Plant. CEMIG has a 49%interest in the consortium, and is responsible for the sale of 100% of thephysical guarantee of this Small Hydro Plant.

 

*Generation*

 

Accordingto ANEEL, at December 31, 2009, we were the seventh largest electric powergeneration concessionaire in Brazil as measured by total installed capacity. AtDecember 31, 2009, we generated electricity at 54 hydroelectric plants,three thermoelectric plants and two wind farms and had a total installedgeneration capacity of 6,642 MW of which hydroelectric plants accounted for6,443 MW, thermoelectric plants accounted for 184 MW and our wind farmsaccounted for 15.11 MW. Eight of our hydroelectric plants accounted forapproximately 81% of our installed electric generation capacity in 2009.  Duringthe year ended December 31, 2009, we recorded expenses totaling R$756million relating to transmission charge payments made to the ONS and totransmission concession holders. See “Item 5. Operating and Financial Reviewand Prospects” and “The Brazilian Power Industry.”

 

*Transmission*

 

Weare engaged in the electric power transmission business, which consists oftransporting electric power from the facilities where it is generated to thedistribution networks for delivery to final users. We transport energy producedat our own generation facilities as well as energy that we purchase fromItaipu, and other sources, as well as the energy for the interconnected powersystem 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 Brazilian Grid regulated by the ONS. See “—The BrazilianPower Industry.” As of December 31, 2009, our transmission network inMinas Gerais consisted of 1,352 miles of 500 kV lines, 1,244 miles of 345 kVlines and 485 miles of 230 kV lines, as well as 35 substations with a total of94 transformers and an aggregate transformation capacity of 15,506 MVA.

 

*Distribution*

 

ThroughCemig Distribution, we have four distribution concession agreements in thestate of Minas Gerais that grant us rights to supply electricity to consumersin that area, including consumers that may be eligible, under the legislation,to become Free Consumers (consumers with demand equal to or greater than3 MW, or consumers with demand equal to or greater than 500 kW from alternative energy sources, such as wind, biomass or SmallHydroelectric Plants). Our concession area covers approximately 219,103 

 

27

----

Table of Contents

 

squaremiles, or 96.7% of the territory of the state. As of December 31, 2009, weowned and operated 294,552 miles of distribution lines, through which wesupplied 22,332 GWh to approximately 6.8 million consumers.

 

In2009, a total of 15,081 GWh was carried and delivered by the electricitydistribution systems. The total amount of electricity supplied to distributionconsumers was 37,413 GWh, of which 52.2% was supplied to industrial consumers,20.8% to residential consumers, 12.7% to commercial consumers, 5.9% to ruralconsumers and 8.3% to other consumers. Cemig Distributionis the largest electricity distribution concession holder in Brazil.

 

*Other Businesses*

 

Whileour main business consists of the generation, transmission and distribution ofelectricity, we also engage in the following businesses: (i) distributingnatural gas in Minas Gerais through our subsidiary, Gasmig,(ii) telecommunications through our consolidated subsidiary CemigTelecomunicações S.A. (formerly Empresa de Infovias S.A), a company created toprovide fiber-optics and coaxial cable network installed along our transmissionand distribution lines through which telecommunication services can beprovided; (iii) national and international consulting business through oursubsidiary Efficientia S.A., whose focus is to provide our largest customers inthe industrial, service and commercial sectors with energy solutions; and(iv) implementation and management of systems for electricity sectorcompanies (generation, distribution and transmission) through our subsidiaryAxxiom Soluções Tecnológicas S.A., incorporated on August 27, 2007. Wealso seek to strengthen our businessin gas and the development of alternative sources of energy, particularly oil.On February 9, 2009, our by-laws were amended to create the Office of theChief Officer for the Gas Division, who is responsible for coordinating all thepolicies and processes for exploration, acquisition, storage, transportation,transmission, distribution and sale of oil and gas and their sub-products,whether derived directly or through third parties.

 

**Revenue Sources**

 

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

 
| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Electricity sales to final consumers                  |       | 10,994                                     |       | 10,497 |   | 10,191 |   |
| Electricity sales to the interconnected power  system |       | 1,682                                      |       | 1,069 |   | 1,134 |   |
| Use of basic transmission and distribution  networks  |       | 1,999                                      |       | 1,865 |   | 1,705 |   |
| Services rendered                                     |       | 84                                         |       | 82 |   | 61 |   |
| Telecommunication and other                           |       | 193                                        |       | 159 |   | 175 |   |
| Total                                                 |       | 14,952                                     |       | 13,672 |   | 13,266 |   |

 

**PowerGeneration and Trading**

 

*Overview*

 

Thefollowing table sets forth certain operating information concerning ourelectric power generation plants as of December 31, 2009:

 
| **Facility**               | ** ** | **Installed  Capacity  (MW)** | ** ** | **Assured  Energy (1)  (average MW)** | ** ** | **Year  Commenced  Operations** | ** ** | **Installed  Capacity  % of Total** | ** ** | **Date  Concession or  Authorization  Expires** | ** ** | **CEMIG’s  Interest** | ** ** |
|----------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|----------------------------|------------|
| Major Hydroelectric Plants |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |       |
| São Simão        |       | 1,710                         |       | 1,281.0                                    |       | 1978                            |       | 25.7                                          |       | January 2015                               |       | 100                        | %          |
| Emborcação       |       | 1,192                         |       | 497.0                                      |       | 1982                            |       | 17.9                                          |       | July 2025                                  |       | 100                        | %          |
| Nova Ponte                 |       | 510                           |       | 276.0                                      |       | 1994                            |       | 7.7                                           |       | July 2025                                  |       | 100                        | %          |
| Jaguara                    |       | 424                           |       | 336.0                                      |       | 1971                            |       | 6.4                                           |       | August 2013                                |       | 100                        | %          |
| Miranda                    |       | 408                           |       | 202.0                                      |       | 1998                            |       | 6.1                                           |       | December 2016                              |       | 100                        | %          |
| Três Marias           |       | 396                           |       | 239.0                                      |       | 1962                            |       | 6.0                                           |       | July 2015                                  |       | 100                        | %          |
| Volta Grande               |       | 380                           |       | 229.0                                      |       | 1974                            |       | 5.7                                           |       | February 2017                              |       | 100                        | %          |
| Irapé                 |       | 360                           |       | 206.3                                      |       | 2006                            |       | 5.4                                           |       | February 2035                              |       | 100                        | %          |
| Aimorés               |       | 161.7                         |       | 84.3                                       |       | 2005                            |       | 2.4                                           |       | December 2035                              |       | 49                         | %          |
| Salto Grande               |       | 102                           |       | 75.0                                       |       | 1956                            |       | 1.5                                           |       | July 2015                                  |       | 100                        | %          |
| Funil                      |       | 88                            |       | 43.6                                       |       | 2002                            |       | 1.3                                           |       | December 2035                              |       | 49                         | %          |
| Queimado                   |       | 86.6                          |       | 47.8                                       |       | 2004                            |       | 1.3                                           |       | January 2033                               |       | 82.5                       | %          |
| Sá Carvalho           |       | 78                            |       | 58.0                                       |       | 2000                            | (2)        | 1.2                                           |       | December 2024                              |       | 100                        | %          |

 

28

----

Table of Contents

 
| **Facility**                 | ** ** | **Installed  Capacity  (MW)** | ** ** | **Assured  Energy (1)  (average MW)** | ** ** | **Year  Commenced  Operations** | ** ** | **Installed  Capacity  % of Total** | ** ** | **Date  Concession or  Authorization  Expires** | ** ** | **CEMIG’s  Interest** | ** ** |
|------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|----------------------------|------------|
| Rosal Energia                |       | 55                            |       | 30.0                                       |       | 2004                            | (2)        | 0.8                                           |       | May 2032                                   |       | 100                        | %          |
| Itutinga                     |       | 52                            |       | 28.0                                       |       | 1955                            |       | 0.8                                           |       | July 2015                                  |       | 100                        | %          |
| Baguari                      |       | 47.60                         |       | 27.26                                      |       | 2009                            |       | 0.7                                           |       | August/2041                                     |       | 34                         | %          |
| Amador Aguiar I              |       | 50.5                          |       | 32.6                                       |       | 2006                            |       | 0.8                                           |       | August/2036                                     |       | 21.05                      | %          |
| Amador Aguiar II             |       | 44.21                         |       | 27.6                                       |       | 2007                            |       | 0.7                                           |       | August/2036                                     |       | 21.05                      | %          |
| Camargos                     |       | 46                            |       | 21.0                                       |       | 1960                            |       | 0.7                                           |       | July 2015                                  |       | 100                        | %          |
| Porto Estrela                |       | 37                            |       | 18.6                                       |       | 2001                            |       | 0.6                                           |       | July 2032                                  |       | 33.3                       | %          |
| Igarapava                    |       | 30.4                          |       | 24.4                                       | (3)        | 1999                            |       | 0.5                                           |       | December 2028                              |       | 14.5                       | %          |
| Pai Joaquim (5)              |       | 23                            |       | 13.9                                       |       | 2004                            |       | 0.4                                           |       | April 2032                                 |       | 100                        | %          |
| Cachoeirão              |       | 13.23                         |       | 8.02                                       |       | 2008                            |       | 0.2                                           |       | July 2030                                  |       | 49                         | %          |
| Piau                         |       | 18                            |       | 8.0                                        |       | 1955                            | (2)        | 0.3                                           |       | July 2015                                  |       | 100                        | %          |
| Gafanhoto                    |       | 14                            |       | 6.7                                        |       | 1946                            |       | 0.2                                           |       | July 2015                                  |       | —                     |       |
| Smaller Hydroelectric Plants |       | 115.2                         |       | 62.4                                       |       | —                          |       | 1.7                                           |       | —                                          |       | —                     |       |
| Thermoelectric Plants        |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |       |
| Igarapé                 |       | 131                           |       | 71.3                                       |       | 1978                            |       | 2.0                                           |       | August 2024                                |       | 100                        | %          |
| Ipatinga                     |       | 40                            |       | 40                                         |       | 2000                            | (2)        | 0.6                                           |       | December 2014                              |       | 100                        | %          |
| Barreiro (6)                 |       | 12.9                          |       | 11.4                                       |       | 2004                            |       | 0.2                                           |       | April 2023                                 |       | 100                        | %          |
| Wind Farm                    |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |       |
| Morro do Camelinho           |       | 1                             |       | 0.3                                        |       | 1994                            |       | 0.0                                           |       | Indefinite                                      |       | 100                        | %          |
| Praias do Parajuru           |       | 14.11                         |       | 6.11                                       |       | 2009                            |       | 0.2                                           |       | September 2032                             |       | 49                         | %          |
|                         |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |       |
| Total                        |       | 6,641.45                      | (4)        | 4,012.59                                   | (4)        | —                          |       | 100.0                                         | %          | —                                          |       | —                     |       |

 

----

| (1) | Assured  Energy is the plant’s long-term average output, as established by MME in  accordance with studies conducted by the EPE. Calculation of Assured Energy  considers such factors as reservoir capacity and connection to other power  plants. Contracts with final consumers and other concessionaires do not  provide for amounts in excess of a plant’s Assured Energy. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Indicates  our date of acquisition.                                                                                                                                                                                                                                                                                                                                                       |
| (3) | The  amount of 5.49 average MW of Assured Energy, as set forth in the agreement  with a consortium formed by Cemig Generation and Transmission and Companhia  Vale do Rio Doce, Companhia Siderúrigica Nacional, Votorantim Metais e Zinco  S.A and Anglogold Ashanti Brasil Ltda., is included.                                                                                     |
| (4) | This  amount does not include energy related to our investment in Light, since we  do not have ownership or operational control of any of Light’s energy assets.                                                                                                                                                                                                                     |
| (5) | On  December 19, 2005, ANEEL approved the transfer of the authorization to  produce and sell the energy of the Pai Joaquim Small Hydroelectric Power  Plant from Central Hidrelétrica Pai Joaquim S.A. to Cemig PCH S.A.                                                                                                                                                        |
| (6) | The  Formoso Plant was deactivated according to ANEEL Decision no. 2,013 of  May 29, 2009.                                                                                                                                                                                                                                                                                           |

 

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

 
| ** **                                     | ** ** | **Circuit Length of Generation Lines in Miles  (from power plants to generation substations)** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **As of December 31,**                                                                                                                 | ** ** |
| **Voltage of Connection Lines** | ** ** | **2009**                                                                                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| 500 kV                                         |       | 7                                                                                                                                                     |       | 7 |   | 7 |   |
| 345 to 230 kV                                  |       | 81                                                                                                                                                    | (1)        | 15 |   | 15 |   |
| 161 to 138 kV                                  |       | 112                                                                                                                                                   |       | 112 |   | 112 |   |
| 69 to 13.8 kV                                  |       | 163                                                                                                                                                   | (2)        | 134 |   | 102 |   |
| Total                                          |       | 363                                                                                                                                                   |       | 268 |   | 236 | (3) |

 
| ** **                       | ** ** | **Step-Down Transformation Capacity(4)  of Generation Substations** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                   | ** ** |
| ** **                       | ** ** | **2009**                                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                             |       |                                                                                    |       |   |   |   |   |
| Number of step-down  substations |       | 59                                                                                      |       | 58 |   | 57 |   |
| MVA                              |       | 7,332                                                                                   |       | 7,141 | (3) | 7,125 |   |

 

----

(1)                                The circuitlength of our 230 kV connection lines increased in 2009 because the Baguarifacility began its operations.

(2)                                The circuitlength of our 69 kV connection lines increased in 2009 because the Wind FarmPraias do Parajuru began its operations.

 

29

----

Tableof Contents

 

(3)                                This amountdoes not include the Light acquisition.

(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.

 

*Generation Assets*

 

Wehave incorporated the following subsidiaries in the State of Minas Gerais andother states of Brazil to operate certain of our generation facilities and tohold the related concessions:

 

*Usina Térmica Ipatinga S.A. —*We operate theIpatinga Thermoelectric Power Plant through our subsidiary Usina TérmicaIpatinga S.A. This plant is an SPP (self power producer) installed and operatedwithin the premises of Usinas Siderúrgicas de Minas Gerais S.A.—USIMINAS, orUsiminas, a large Brazilian steel manufacturer. The plant supplies power to alarge steel mill owned by Usiminas, located in eastern Minas Gerais. We acquiredthe Ipatinga plant in 2000 for R$90 million from Usiminas as payment foroutstanding power supply debts. We have signed a power purchase agreement withUsiminas for power produced at Ipatinga. The plant currently has an installedcapacity of 40 MW, generated by two units that began operating in 1986 and thatuse blast furnace gas as fuel.

 

*Sá Carvalho S.A. —*We operate the Sá CarvalhoHydroelectric Power Plant, located on the Piracicaba River in the municipalityof Antônio Dias in the State of Minas Gerais, through our subsidiary SáCarvalho S.A., which we acquired in 2000 for R$87 million from Acesita S.A., orAcesita, a steel company.

 

*Rosal Energia S.A. —*In December 2004 webought the Rosal**hydroelectric plant, which hasinstalled capacity of 55 MW, from Caiuá Serviços de Eletricidade S.A., orCaiuá, for a payment of R$134 million. The Rosal plant, the sole asset of RosalEnergia, is located on the Itabapoana River, which runs along the borderbetween the States of Espírito Santo (Municipality of Guaçuí) and Rio deJaneiro (Municipality of Bom Jesus de Itabapoana). 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 rotorsstarted operating in December 1999 and January 2000, respectively. Ithas a concession contract for 35 years, maturing in 2032.

 

*Cemig Capim Branco Energia S.A. —*We incorporatedCemig Capim BrancoEnergia S.A. to develop the Capim Branco Generating Complex in partnership withCompanhia Vale do Rio Doce, or CVRD, a mining company, Comercial e AgrícolaPaineiras, an agricultural company, and Companhia Mineira de Metais, or CMM, ametallurgical company. ANEEL Resolution 314 of April 11, 2006, allowed thetransfer of the electricity generation concession of CMM (through CMM’sparticipation in Cemig Capim BrancoEnergia S.A.) to Votorantim Metais Zinco S.A., or VMZ; and ANEEL Resolution 478of June 12, 2007 ratified the transaction. On March 16, 2007, ANEELpublished Ruling No. 683 approving the change of the name of the CapimBranco Generating Complex to the Amador Aguiar Generating Complex. The projectconsists of the Amador Aguiar I and Amador Aguiar II Hydroelectric PowerPlants, with installed capacity of 240 MW and 210 MW, respectively. We haveentered into a purchase contract with Cemig Capim BrancoEnergia S.A. under which Cemig Distributionwill purchase the energy produced by Amador Aguiar I and Amador Aguiar II for20 years from the start date of each plant’s commercial operations, which inthe case of Amador Aguiar I was February 21, 2006, and in the case ofAmador Aguiar II was March 9, 2007. This contract was submitted to ANEELin 2003 and was approved in December 2004.

 

*Horizontes Energia S.A. —*Weformed Horizontes Energia S.A., or Horizontes Energia, to generate and tradeelectricity as an IPP (independent power producer) through the commercialoperation of the following of our smaller hydroelectric plants: the MachadoMineiro Power Plant (located on the Pardo River in the municipality of Ninheirain the State of Minas Gerais, with an installed capacity of 1.72 MW); the Saltodo Paraopeba Power Plant (located on the Paraopeba River in the town of Jeceabain the State of Minas Gerais, with an installed capacity of 2.37 MW; the SaltoVoltão Power Plant (located on the Chapecozinho River in the city of Xanxerê inthe State of Santa Catarina, with an installed capacity of 8.2 MW); and theSalto do Passo Velho Power Plant (also located on the Chapecozinho River inXanxerê, Santa Catarina, with an installed capacity of 1.8 MW), as well asother generating projects to be acquired or built with our participation. Theconcession relating to the Machado Mineiro Power Plant expires on July 7,2025; the concessions relating to the other plants expire on October 4,2030. All the electricity generated by Horizontes Energia S.A. is allocated forsale in the ACL, and part of this electricity has been committed for sale up tothe year 2011. The Salto do Paraopeba Power Plant is currently out of servicefor refurbishment. We expect that this power plant will resume its operations in 2011.

 

*Usina Termelétrica Barreiro S.A. —*We formed UsinaTermelétrica Barreiro S.A. to participate, in partnership withVallourec & Mannesmann—V&M do Brasil S.A., or Vallourec &Mannesmann, a metallurgic company, in the construction and operation of the12.9 MW Barreiro Thermoelectric Power Plant, located on Vallourec &Mannesmann’s premises in the Barreiro neighborhood of the city of BeloHorizonte in Minas Gerais. Construction started in July 2002 andcommercial generation began in

 

30

----

Table ofContents

 

February 2004.Usina Termelétrica Barreiro S.A. holds the assets of the BarreiroThermoelectric Power Plant and trades its production of energy.

 

*Cemig PCH S.A. —*We formed Cemig PCH S.A. togenerate and trade electric energy as an IPP. Its main activity is theproduction and sale of electricity through the Pai Joaquim Small HydroelectricPower Plant, as an IPP. This plant, located on the Araguari River, has an installedcapacity of 23 MW and begin its commercial operation on March 31, 2004.Cemig PCH S.A. holds the assets of the Pai Joaquim Small Hydroelectric PowerPlant, and trades the energy produced by this plant.

 

*Irapé Hydroelectric Power Plant —*The Irapé Hydroelectric Power Plant, which has an installed capacity of360 MW, is located on the Jequitinhonha River, in northern Minas Gerais.Construction began in April 2002 and its three units began to generateelectricity commercially on July 20, 2006, August 5, 2006, andOctober 3, 2006. The concession relating to this plant expires onFebruary 28, 2035.

 

*Cachoeirão Small Hydroelectric Power Plant —*Cemig Generation and Transmission negotiated anownership interest in the construction and operation of Cachoeirão SmallHydroelectric Power Plant. Together with our partner in this project, SantaMaria Energética S.A. (“Santa Maria Energética”), we formed SPC HidrelétricaCachoeirão S.A., to build and operate the Cachoeirão Small Power Plant. Thisplant, with an installed capacity of 27 MW, is located on the Manhuaçu River,in the eastern part of Minas Gerais. CemigGeneration and Transmission has a 49% ownership interest in the SPC andSanta Maria Energética has a 51% ownership interest. Santa Maria Energética isa special-purpose company which holds the authorization for commercial operation of the Cachoeirão SmallHydroelectric Power Plant and at the end of January 2007 applied toANEEL for permission to transfer this authorization to Hidrelétrica CachoeirãoS.A. Construction began in March 2007 and the facility began operating inDecember 30, 2008. The concession relating to this plant expires onJuly 27, 2030.

 

Cemig Generation and Transmissionalso operates the following power plants:

 

*Queimado Hydroelectric Power Plant —*Our partner inthis project is Companhia Energética de Brasília, or CEB, a state-controlledelectricity company. CEB has a 17.5% interest and we have the remaining 82.5%.The plant, with an installed capacity of 105 MW, is located on the Preto River,and encompasses areas in the States of Minas Gerais and Goiás and in Brazil’sFederal District. The power plant began its commercial generation onApril 9, 2004, with the operation of its first unit. The commercialoperation of the second and third units began on June 16, 2004, andJuly 8, 2004, respectively..  Theconcession relating to this plant expires on January 02, 2033. Currently,our partner in Queimado is CEB Participações S.A. (CEBPar), a subsidiary ofCEB, as per the second Amendment to Concession Contract 006/1997, executed on July 17,2009.

 

*Aimorés Hydroelectric Power Plant —*The AimorésHydroelectric Power Plant, located on the Doce River, has an installed capacityof 330 MW. We have a 49% interest in this enterprise and our partner, ValesulAlumínio S.A., has a 51% interest. Partial commercial generation began onJuly 30, 2005, and the plant began operating at full capacity inNovember 2005, when we obtained the operational license from the BrazilianInstitute of the Environment and Renewable Natural Resources, or IBAMA. The concession relating to this plantexpires on December 20, 2035.

 

*Funil**Hydroelectric Power Plant —*Also referred to as the José Mendes JuniorHydroelectric Plant, the Funil Hydroelectric Power Plant has generating capacity of 180 MW and is located on the Rio Granderiver, in the southern part of Minas Gerais. We have a 49% interest inthis enterprise and our partner, Companhia Vale do Rio Doce, or (“CVRD”), amining company, has a 51% interest..Construction began in September 2000, and its three rotors began togenerate commercially on 2002 and 2003. The concession relating to this plantexpires on December 20, 2035.

 

*Porto Estrela Hydroelectric Plant —*This plant is aproject of the Porto Estrela Hydroelectric Consortium, located in the Serra daEstrela mountains in the State of Minas Gerais. It has two generating units,with total installed capacity of 112 MW. We have a 33% interest in thisenterprise. The start date of the concession was July 1997, and it willend 35 years from the start date, in July 2032. Construction began onJuly 9, 1999, and was completed on November 9, 2001.  The plant’s operational license was obtainedon June 29, 2001, and the first and second generating units startedoperating on September 4, 2001, and November 5, 2001, respectively.

 

*Baguari Hydroelectric Power Plant**—*A consortium formed by Cemig Generation andTransmission, Furnas Centrais Elétricas S.A., or Furnas, an electricityconcessionaire of generation and transmission controlled by the FederalGovernment, and Baguari I Geração de Energia Elétrica S.A, a special-purposecompany, or SPC, that belongs to Neoenergia S.A., a private integratedelectricity sector holding company, has the concession to build and operate theBaguari Hydroelectric Power Plant and sell its energy. The power plant willhave an installed capacity of 140 MW and will be located on the Doce River, inthe State of Minas Gerais. Cemig Generation andTransmission has a 34% interest in this consortium. The energy generated willbe commercialized in the ACR. On December 15, 2006, the State of MinasGerais Environmental Policy Council *(Conselho Estadual dePolítica Ambiental)*, or COPAM, issued the power plant installationlicense. Construction began on May 9, 2007. The plant’s operationallicense was obtained 

 

31

----

Table of Contents

 

onJuly 5, 2009, and the first and second generating units started operatingon September 9, 2009, and November 26, 2009, respectively. The lasttwo generating units started operations in March and May 2010,respectively. The concession relating to this plant expires on August 15,2041. As of December 31, 2009, we had invested R$179 million in thisproject of a total projected investment of R$190 million.

 

*Expansion of Generation Capacity*

 

Weare currently involved in the construction of seven hydroelectric power plants—Dores de Guanhães, Senhora do Porto, Fortuna II, Jacaré, Pipoca, Paracambi andSanto Antônio—that will increase the installed generation capacity of ourhydroelectric facilities by 92.19 MW over the next three years. The followingis a brief description of these projects, the completion of which are subject tovarious contingencies, certain of which are beyond our control.

 

*SPE Guanhães Energia S.A. —*Cemig Generation andTransmission has negotiated an ownership interest in the construction andoperation of the Small Hydro Plants, or PCHs, of Dores de Guanhães, Senhora doPorto, Fortuna II and Jacaré. Our partner in this project is InvestminasParticipações S. A., a wholly owned subsidiary of GlobalBank Participações eInvestimentos S.A, which formed, with us, the company SPC Guanhães Energia S.A,or Guanhães Energia. The purpose of Guanhães Energia is to build and operatethese four PCHs, namely: Dores de Guanhães, with 14 MW installed capacity;Senhora do Porto, with 12 MW capacity; Jacaré, with 9 MW; and Fortuna II, with9 MW. Dores de Guanhães, Senhora do Porto and Jacaré will be built on theGuanhães River, located in the municipality of Dores de Guanhães, State ofMinas Gerais, and Fortuna II will be built on the Corrente Grande River,located in the municipalities of Guanhães and Virginópolis, State of MinasGerais. Cemig Generation andTransmission has a 49% ownership interest in Guanhães Energia, whileInvestminas Participações has the remaining 51%. Construction is expected tobegin in September 2010, and commercial operation is expected to begin inthe first half of 2012. The concessions relating to these plants expire inDecember 2031 with respect to Fortuna II, November 2032 with respectto Dores de Guanhães and October 2032 with respect to Senhora do Porto andJacaré. As of December 31, 2009, we had invested R$9.6 million in thisproject.

 

*Pipoca Small Hydroelectric Power Plant —* Cemig Generation and Transmission has alsonegotiated a stake in the construction and operation of the Pipoca SmallHydroelectric Power Plant, in partnership with Omega Energia Renovável S.A.,founded by the investment companies “Tarpon Investimentos” and “WinbrosParticipações, Gestão e Investimentos,” to implement and operate the project.Through Cemig Generation and Transmission, we have a 49% interest inHidrelétrica Pipoca S.A.. The plant, with an installed capacity of 20 MW, willbe located on the Manhuaçu River, in the eastern part of the State of MinasGerais. Construction began in October 2008 and commercial generation isexpected to begin in July 2010. The concession relating to this plantexpires on September 10, 2031. As of December 31, 2009, we hadinvested R$17 million in this project.

 

*Paracambi Small Hydroelectric Power Plant —*Cemig Generation and Transmission has alsonegotiated a stake in the construction and operation of the Paracambi SmallHydroelectric Power Plant, in partnership with Lightger S.A., a US investmentcompany, to implement and operate the project. We will have a 49% interest inthis project. The plant, with an installed capacity of 25 MW, will be locatedon the Lajes River, in the eastern part of the State of Rio de Janeiro.Construction began in November 2009 and commercial generation is expectedto begin in September 2011 and November 2011. The concession relatingto this plant expires on December 2, 2031. In August 2009, CEMIG’s Board ofDirectors approved the effective participation of the Company in thisventure.  As of December 31, 2009,we had not made any investment in this project.

 

*Madeira Energia S.A.**—*MESA is a special-purposecompany created to implement, build, operate and maintain the Santo Antôniohydroelectric plant, in the basin of the Rio Madeira, in the northern region ofBrazil. This facility will have a generating capacity of 3,150 MW. MESA isexpected to begin operations in 2012. Cemig Generation andTransmission has a 10% interest in MESA, and based on our ownership interest,we expect to invest R$1,416 million in the development of the project.

 

*Co-generation Joint Ventures with Consumers*

 

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

 

*Wind Farms*

 

Electricgeneration based on wind power is becoming one of the most promisingpossibilities of power generation for the near future. Besides its reducedenvironmental impact, this energy source is completely renewable and widelyavailable in Brazil, according to recent prospective studies.  Also, its fast technical development duringrecent decades resulted in competitive costs per 

 

32

----

Table of Contents

 

MWhcomparing to other alternatives of electric power generation. CEMIG is monitoring the accelerated evolution ofwind power based generation and its inclusion in Brazilian energy portfolio.

 

Ourfirst wind farm, Morro do Camelinho, began operating in 1994. It is located inGouveia, a municipality in northern Minas Gerais. This project is the firstwind farm in Brazil to be connected to the national electricity transmissiongrid and it is connected to CEMIG’s distribution system. It has a totalgeneration capacity of 1 MW, powered by four turbines with a capacity of 250 kWeach. Morro do Camelinho was built through a technical and scientificcooperation arrangement with the government of Germany. The cost of the projectwas US$1.5 million, with 51% of the cost provided by us and the remaining 49%provided by the government of Germany.

 

OnFebruary 5, 2009, Cemig Generation and Transmission’s Board of Directorsauthorized offering a binding proposal for a share purchase agreement toEnergimp S.A. to purchase a 49% interest in three wind farms located in theState of Ceará, Brazil for the amount of R$223 million. The transaction wascompleted on August 15, 2009. The three wind farms, named UEE Praia doMorgado, UEE Praias de Parajurú and UEE Volta do Rio, have a total installedcapacity of 99.6 MW. The acquisition is subject to the approval of ANEEL, theFederal Savings Bank (*Caixa Econômica Federal*),Eletrobras, and CADE. The UEE Praias de Parajuru started operating in August 2009,UEE Praia do Morgado started operating in May 2010 and the UEE Volta doRio is expected to be operating by July 2010.

 

*Central Eólica Praias de Parajurú S.A*. is located in the countyof Beberibe, in the State of Ceará, 63 miles from the State’s capital,Fortaleza. It started commercial operation in August 2009. All theelectricity, totaling 106,604 MWh/year, has been sold to Eletrobras, under theProinfa Program for a period of 20 years.

 

*Central Eólica Praia do Morgado S.A* is located in the county ofAcaraú, in the State of Ceará, 174 miles from the State’s capital, Fortaleza.It started operating in May 2010. All the electricity, totaling 115,636MWh/year, has been sold to Eletrobras, under the Proinfa Program for a periodof 20 years.

 

*Central Eólica Volta do Rio S.A*is located in the county ofAcaraú, in the State of Ceará, 149 miles from the State’s capital, Fortaleza,is expected to start operation in July 2010. All the electricity, totaling161,238 MWh/year, has been sold to Eletrobras, under the Proinfa Program for aperiod of 20 years.

 

*PowerTrading*

 

Underthe present regulations of the Brazilian electricity sector, power generationcompanies are allowed to operate in trading as well as the sale of their ownproduction. CEMIG intensified this activity in 2009, which is complementary ofthe sale of its own generation, buying electricity for future sale through itspower generation and trading subsidiaries, aiming further to increase thecompany’s results. CEMIG’s wholesale commercialization policy is approved bythe Board of Directors and the transactions are individually approved by theExecutive Board.

 

Thesetransactions were previously submitted for analysis by the Energy RisksManagement Committee, in which representatives of various areas of CEMIG —financial, legal, commercial, regulatory and planning — participate, for thepurpose of determining the risks and results expected, using, for this,analysis of market conditions, hydrology simulation models, energy risk models,estimates of spot prices and calculation of the profit at risk.

 

Theresults of the trading activities depend on market conditions, which may bedifferent from the company’s expectations. To mitigate this risk, CEMIG seeksto avoid carrying positions, selling the electricity bought as soon aspossible.

 

**Transmission**

 

*Overview*

 

Ourtransmission business consists of the bulk transfer of electricity from thepower plants where it is generated to the distribution system, which carriesthe electricity to final consumers, and others consumer agents connecteddirectly in the basic transmission grid. Our transmission system is comprisedof transmission lines and step-down substations with voltages ranging from 230kV to 500 kV.

 

Duringthe year ended December 31, 2009, we recorded revenue totaling R$627million as a result of our transmission business. In turn, because we are alsoa distribution company and because we purchase electricity from Itaipu andothers, our use of the basic transmission network requires us to pay scheduledrates to the National System Operator (*Operador Nacional doSistema*), or 

 

33

----

Table of Contents

 

ONS,and owners of different parts of the basic transmission network. See “Item 5.Operating and Financial Review and Prospects” and “—The Brazilian PowerIndustry.”

 

Wetransmit both the energy that we generate and the energy that we purchase fromItaipu and other sources, as well as the energy for the interconnected powersystem. On December 31, 2009, we also had 13 industrial free consumers towhom we transported 4,103 GWh directly with high voltage (equal to or greaterthan 230 kV per industrial consumer) energy through their connections to ourtransmission lines. Nine of these industrial clients are CEMIG’s energyconsumers and accounted for approximately 66.9% of the transported total volumeof electricity. We also transmit energy to distribution systems through thesouth/southeast-linked system of the grid.

 

Thefollowing tables set forth certain operating information pertaining to ourtransmission capacity for the dates indicated:

 
| ** **                                       | ** ** | **Circuit Length of Transmission Lines in Miles  (from generation substations to distribution substations)** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                     | ** ** |
| **Voltage of Transmission Lines** | ** ** | **2009**                                                                                                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| 500 kV                                           |       | 1,352                                                                                                                                                     |       | 1,352 |   | 1,352 |   |
| 345 kV                                           |       | 1,244                                                                                                                                                     |       | 1,244 |   | 1,244 |   |
| 230 kV                                           |       | 485                                                                                                                                                       |       | 485 |   | 485 |   |
| Total                                            |       | 3,081                                                                                                                                                     |       | 3,081 |   | 3,081 |   |

 
| ** **                      | ** ** | **Step-Down Transformation Capacity(1)  of Transmission Substations** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **As of December 31,**                                                     | ** ** |
| ** **                      | ** ** | **2009**                                                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Number of step-down substations |       | 35                                                                                        |       | 35 |   | 35 |   |
| MVA                             |       | 15,503                                                                                    |       | 15,503 |   | 15,503 |   |

 

----

(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.

 

*Transmission Assets*

 

*Montes Claros—Irapé —*In September 2003, aconsortium formed by Companhia Técnica de Engenharia Elétrica—ALUSA, or ALUSA,Furnas, Orteng Equipamentos e Sistemas Ltda., or Orteng, and CEMIG, won theconcession auctioned by ANEEL to the Montes Claros—Irapé transmission line. Asrequired in the bidding process, the partners formed the Companhia Translestede Transmissão, which is responsible for building and operating thetransmission line. We have a 25% interest in this company. This 345 kVtransmission line connects a substation located in Montes Claros, a city innorthern Minas Gerais, and the substation of the Irapé Hydroelectric PowerPlant, with a length of approximately 86 miles. Construction of the projectbegan in January 2005 and transmission line operations began onDecember 18, 2005. The concession expires on February 18, 2034. As ofDecember 31, 2009, we had invested R$12.4 million in this project.

 

*Itutinga—Juiz de Fora —*In September 2004, aconsortium formed by ALUSA, Furnas, Orteng and CEMIG, with interests of 41%,25%, 10%, and 24% respectively, won the concession auctioned by ANEEL to theItutinga—Juiz de Fora transmission line. As required in the bidding process,the partners formed the Companhia Transudeste de Transmissão, which isresponsible for building and operating this transmission line. This 345 kVtransmission line, with a length of approximately 89 miles, connects thesubstation of the Itutinga Hydroelectric Power Plant and a substation locatedin Juiz de Fora, a city in southeastern Minas Gerais. We began the project inMarch 2005, and commercial operations began on February 23, 2007. Asof December 31, 2009, we had invested R$8.5 million in this project.

 

*Irapé—Araçuaí —*In November 2004, aconsortium formed by ALUSA, Furnas, Orteng and CEMIG with interests of 41%,24.5%, 10% and 24.5% respectively, won the concession auctioned by ANEEL to theIrapé—Araçuaí transmission line. As required in the bidding process, thepartners formed the Companhia Transirapé de Transmissão, which is responsiblefor building and operating this transmission line. This 230 kV transmissionline, with a length of approximately 38 miles, connects the substation of theIrapé Hydroelectric Power Plant and a substation in Araçuaí, a city located innortheastern Minas Gerais. We began the project in March 2005, andcommercial operations began on May 23, 2007. As of December 31, 2009,we had invested R$6.3 million in this project.

 

*Furnas—Pimenta —*In September 2004, aconsortium formed by Furnas and CEMIG, with interests of 49%, and 51%,respectively, won the concession auctioned by ANEEL to the Furnas—Pimentatransmission line. As required in the bidding process, 

 

34

----

Table of Contents

 

thepartners formed the Companhia de Transmissão Centroeste, which is responsiblefor building and operating the transmission line. This 345 kV transmissionline, with a length of approximately 47 miles, connects the substation of theFurnas Hydroelectric Power Plant and a substation located in Pimenta, a city inthe west-central region of Minas Gerais. We began the project inMarch 2005. Its commercial operation began in March 2010.  As of December 31, 2009, we had investedR$16.6 million in this project.

 

*Charrúa—Nueva Temuco —*In April 2005 aconsortium formed by ALUSA and CEMIG, with interests of 51% and 49%,respectively, won the concession auctioned by Centro de Despacho Económico deCarga del Sistema Interconectado Central, or CDEC—SIC, of Chile to build,operate and maintain the Charrúa—Nueva Temuco 220 kV transmission line for 20years. This was an important event in CEMIG’s history, as it was our firstasset outside of Brazil. We and ALUSA formed Transchile Charrúa TransmisiónS.A., an SPC incorporated in Chile and responsible for building and operatingthe transmission line. With a length of approximately 116 miles, the transmissionline connects the substations of Charrúa and Nueva Temuco in central Chile. Webegan the project in June 2005 and construction began in April 2007.On July 18, 2007, Transchile Charrúa Transmisión S.A. entered into aproject finance agreement with the Inter-American Development Bank in theamount of US$51.0 million related to the transmission line and substations.Commercial operation began in January 2010. As of December 31, 2009,we had invested R$27.6 million in this project.

 

*Expansion of Transmission Capacity*

 

Webelieve that our transmission system will need to be reinforced and expandedthrough the construction of new substations and transmission lines within thenext five years.

 

Inaccordance with the new regulatory framework in the Brazilian electricitysector, concessions for the expansion of the electricity transmissioninfrastructure in Brazil are awarded by means of public biddings or areauthorized by ANEEL. The following is a brief description of our currenttransmission projects, the completion of which are subject to various contingencies,certain of which are beyond our control:

 

*EBTE—Transmission Lines in the State of Mato Grosso —* InJune 2008, an SPC formed by EATE and Cemig Generation andTransmission, with interests of 51%, and 49%, respectively, won the concessionauctioned by ANEEL to a group of five transmission lines and two substations.As required in the bidding process, the partners formed EBTE, which isresponsible for building and operating the transmission lines. The 230 kVtransmission lines and substations consist of three double-circuit linesextending 344 miles and two simple-circuit lines extending 138 miles, reachinga total length of 775 482 miles, and will connect seven substations indistricts of Juína, Brasnorte, Sapezal, Nova Mutum, Sorriso, Sinop, Tangará daSerra, Campo Novo dos Parecis, Lucas do Rio Verde and Vera, all located in thenorthern region of the State of Mato Grosso. The project was initiated inJanuary 2009, and we expect the transmission lines operation to begin inJuly 2010. As of December 31, 2009, we had invested R$76.7 million inthis project.

 

**Distributionand Purchase of Electric Power**

 

*Overview*

 

Ourdistribution operation consists of electricity transfers from distributionsubstations to final consumers. Our distribution network is comprised of awidespread network of overhead and underground lines and substations withvoltages lower than 230 kV. We supply electricity to small industrial consumersat the higher end of the voltage range and residential and commercial consumersat the lower end of the range.

 

During the year ended December 31, 2009, werecorded expenses totaling R$756million relating to transmission payments made to the NationalIntegrated System Operator (Operador Nacional do Sistema, or ONS) and other transmission concession holders. See “Item 5. Operating andFinancial Review and Prospects” and “The Brazilian Power Industry.”

 

FromJanuary 1, 2002 through December 31, 2009, we invested approximatelyR$851 million in the construction and acquisition of property, plant and equipmentused to expand our distribution system.

 

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

 

35

----

Table of Contents

 
| ** **                                       | ** ** | **Circuit Length of Distribution Lines in Miles  - High Voltage  (from distribution substations to final consumers)** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                                        | ** ** |
| **Voltage of Distribution Lines** | ** ** | **2009**                                                                                                                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| 161 kV                                           |       | 34.2                                                                                                                                                                         |       | 34.2 |   | 34.2 |   |
| 138 kV                                           |       | 6,897.2                                                                                                                                                                      |       | 6,824.5 |   | 6,756.8 |   |
| 69 kV                                            |       | 2,817.9                                                                                                                                                                      |       | 2,817.7 |   | 2,802.4 |   |
| 34.5 kV + Others                                 |       | 593.4                                                                                                                                                                        |       | 600.2 |   | 600.2 |   |
| Total                                            |       | 10,342.7                                                                                                                                                                     |       | 10,276.6 |   | 10,193.6 |   |

 
| ** **                           | ** ** | **Circuit Length of Distribution Lines in Miles - Medium and Low Voltage  (from distribution substations to final consumers)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **As of December 31,**                                                                                                    | ** ** |
| **Type  of Distribution Lines**      | ** ** | **2009**                                                                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Overhead urban distribution lines    |       | 55,608.2                                                                                                                       |       | 53,685.9 |   | 53,064.8 |   |
| Underground urban distribution lines |       | 426.9                                                                                                                          |       | 426.9 |   | 257.9 |   |
| Overhead rural distribution lines    |       | 219,557.5                                                                                                                      |       | 217,366.8 |   | 210,014.4 |   |
| Total                                |       | 275,592.6                                                                                                                      |       | 271,479.6 |   | 263,337.1 |   |

 
| ** **            | ** ** | **Step-Down Transformation Capacity(1)  of Distribution Substations** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------|------------|
| ** **            | ** ** | **As of December 31,**                                           | ** ** |
| ** **            | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Number of substations |       | 360                                                                   |       | 360 |   | 358 |   |
| MVA                   |       | 8,250                                                                 |       | 8,160 |   | 8,145 |   |

 

----

(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.

 

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

 

Asa result, the statistics on extent of networks, number of transformers, publicillumination and quantity of transmission posts are now supplied by the GEMINIsystem on a geo-referenced basis. We believe this has resulted in more precisedata, reduction of errors in valuing fixed assets, and increased reliability.

 

*Expansion of Distribution Capacity*

 

Ourdistribution expansion plan for the next five years is based on projections ofmarket growth. For the next five years, we anticipate an increase ofapproximately 913,000 new urban consumers and 122,000 rural consumers. In orderto accommodate this growth, we expect that we will need to add 225,000medium-voltage poles, 980 miles of transmission lines and 26 step-downsubstations, adding 580 MVA to our distribution network, increasing the network’sinstalled capacity by 705 MVA, including reinforcement. Ongoing projects fordevelopment of our distribution capacity include the following:

 

*Luz para Todos —*We have adopted a rural electricity development program called Light forAll (*Luz para Todos*) program sponsored by theFederal Government and the State Government of Minas Gerais. We plan to use theprogram to meet our goal of providing electricity to 100% of the ruralconsumers in the State of Minas Gerais. The first phase of the Lightfor All program supplied electricity to 190,000 additional rural residences inthe State of Minas Gerais and required a total investment of approximatelyR$1.7 billion, of which CEMIG invested R$1.05billion. This first phase included the Light in the Knowledge (*Luz no Saber*) sub-program which used solar energy to provideelectricity to schools, community centers and rural homes in remote locationsnot yet connected to the distribution network. In 2009, the Federal Government,the State Government and the CEMIG concessionaire launched a second and thirdphases of the program scheduled to end on December 31, 2010. A totalinvestment of R$1,13 billion is projected for these phases of the program, ofwhich CEMIG is responsible for approximately R$373.4 million.  This program will provide electricity to morethan 94.9 thousand rural consumers. Therefore, we entered into twoEngineering and Procurement Contracts (EPC), providing the implementation ofthe second phase of Light for All. One of the agreements, entered into by andbetween Cemig Distribution and Consórcio Iluminas (whichconsists of Construtora Andrade Gutierrez S/A, Orteng Equipamentos e 

 

36

----

Table of Contents

 

SistemasLtda. and Construtora Barbosa Mello S/A), on July 6, 2009, is valid for 22months and involves the total amount of R$ 226 million. The agreement enteredinto by and between Cemig Distribution and Consórcio OSEC/QG/CAMTER (which consists of Odebrecht Serviços de Engenharia e Construção S/A,Construtora Queiroz Galvão S/A and CAMTER Construções e Empreendimentos S/A) onJuly 3, provides for the aggregate amount of R$ 198 million and is alsovalid for 22 months.  At the end of the Light for All Program, whose deadline is December 31,2010, we expect to have covered 285 thousand new clients, benefiting apopulation of approximately 1.5 million inhabitants.

 

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

 

*Cresce Minas*—**GrowMinas (*Cresce Minas*) project was launched in2007 to revitalize and expand the distribution system of the State of MinasGerais, improving the reliability of the system and increasing the quality ofservice to consumers. The project is expected to benefit approximately 340municipalities (41% of the total) of Minas Gerais, encompassing a totalpopulation of approximately 4.1 million, including approximately 1.1 millionconsumers. In 2009, CEMIG invested R$65,5 million in capital expenditures exclusivelyto strengthen the medium-voltage distribution system, out of a total of R$279,4million projected, the balance of which is expected to be invested in turn-keyprojects in 2010. CEMIG also invested R$153 million in 2009 to strengthen thesub-transmission system. In the next two years, we expect to invest anaggregate of R$169 million in our sub-transmission and transmission systems.

 

*Purchase of Electric Power*

 

Duringthe year ended December 31, 2009, we purchased 8,888.51 GWh of electricityfrom Itaipu, which represented approximately 31.84% of the electricity we soldto final users, and 551.69 GWh (1.98%) of electricity from Proinfa. In additionto the electricity purchased from Itaipu and Proinfa, we have two other basictypes of supply arrangements: (i) purchases through public auctions, whichaccounted for approximately 57.38% of the electricity purchased for resaleduring the year ended December 31, 2009, and (ii) long-termagreements existing prior to the New Industry Model Law, which representedapproximately 6.47% of the electricity purchased in 2009.

 

*Itaipu —*Itaipu is one of the largestoperating hydroelectric plants in the world, with an installed capacity of14,000 MW. Centrais ElétricasBrasileiras S.A., or Eletrobras, a holding company controlled by theFederal Government, owns a 50% interest in Itaipu, while the remaining 50% isowned 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. Brazil generally purchases more than 95% ofthe electricity generated by Itaipu.

 

Weare one of the power distribution companies operating in the south, southeastand west-central regions of Brazil that are jointly required to purchase all ofBrazil’s portion of the electricity generated by Itaipu. The Federal Governmentallocates Brazil’s portion of Itaipu’s power among these electric companies inamounts proportionate to their respective historical market share of totalelectricity sales. During the year ended December 31, 2009, we wererequired by law 5.899/ 1973 to purchase approximately 13.52% of the totalamount of electricity purchased by Brazil from Itaipu at rates fixed to defrayItaipu’s operating expenses and payments of principal and interest on Itaipu’sdollar-denominated borrowings and the cost in *reais*of transmitting such power to the interconnected power system. These rates havebeen above the national average for bulk supply of power and are calculated inU.S. dollars. Therefore, fluctuations in the U.S. dollar/*real* exchange rate affect the cost, inreal terms, of electricity we are required to purchase from Itaipu.Historically, we have been able to recover the cost of such electricity bycharging supply rates to consumers. According to our concession agreement,increases in the supply rates may be transferred to the final consumer uponapproval by ANEEL.

 

Inthe second half of 2007, ANEEL declared a decrease inthe amount of energy to be purchased by some distribution companies fromItaipu. In January 2008, the amount of electricity purchased from Itaipuby each of the electric power distribution companies was reviewed andreallocated based on the actual consumption of each of these companies in2004.  Based on its review, ANEEL hasdetermined the quantity of electricity that each distribution company mustpurchase from Itaipu every year until 2015. ANEEL will allocate the amounts of this energy for the distributioncompanies every five years, and it will review the divisions annually so thatthe companies may indicate their electricity requirements that will be suppliedthrough sources other than Itaipu.

 

*Auction Contracts —*We purchased electricity inpublic auctions at the CCEE. These contracts were formalized between CEMIG andthe several sellers in accordance with the terms and conditions established inthe invitation to bid. The following table sets forth the amounts ofelectricity contracted, average tariff and prices related to the CCEARcontracts arising from the electricity 

 

37

----

Table of Contents

 

acquiredby CEMIG in auctions during 2009. It also includes contracts signed before 2009but still effective during that year. See “—The Brazilian Power Industry” formore information on CCEE and CCEAR.

 
| **Average Tariff** | ** ** | **Electricity Contracted  (MW — average per year)** | ** ** | **Term of the Contract** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|--------------------------|------------|
| 57.51              |       |                                                     | 530.17     |                     |       | 2005 to 2012 |   |
| 67.33              |       |                                                     | 919.14     |                     |       | 2006 to 2013 |   |
| 83.13              |       |                                                     | 105.47     |                     |       | 2008 to 2015 |   |
| 106.95             |       |                                                     | 4.47       |                     |       | 2008 to 2037 |   |
| 132.27             |       |                                                     | 35.31      |                     |       | 2008 to 2022 |   |
| 145.77             |       |                                                     | 140.52     |                     |       | 2009 to 2009 |   |
| 114.28             |       |                                                     | 3.16       |                     |       | 2009 to 2038 |   |
| 126.77             |       |                                                     | 60.41      |                     |       | 2009 to 2038 |   |
| 129.26             |       |                                                     | 40.36      |                     |       | 2009 to 2023 |   |
| 132.39             |       |                                                     | 31.02      |                     |       | 2009 to 2023 |   |
| 115.05             |       |                                                     | 91.77      |                     |       | 2010 to 2039 |   |
| 134.99             |       |                                                     | 20.12      |                     |       | 2010 to 2039 |   |
| 121.81             |       |                                                     | 88.98      |                     |       | 2010 to 2024 |   |
| 138.85             |       |                                                     | 61.23      |                     |       | 2010 to 2024 |   |
| 134.67             |       |                                                     | 431.17     |                     |       | 2010 to 2024 |   |
| 120.86             |       |                                                     | 24.71      |                     |       | 2011 to 2040 |   |
| 137.44             |       |                                                     | 23.24      |                     |       | 2011 to 2025 |   |
| 128.42             |       |                                                     | 63.89      |                     |       | 2011 to 2025 |   |
| 129.14             |       |                                                     | 56.57      |                     |       | 2012 to 2041 |   |
| 128.37             |       |                                                     | 126.34     |                     |       | 2012 to 2026 |   |
| 78.87              |       |                                                     | 122.83     |                     |       | 2012 to 2041 |   |

 

*Bilateral Agreements —*Cemig Distributionentered into bilateral agreements with various suppliers prior to the enactmentof the New Industry Model Law in 2004. Such agreements are valid under theiroriginal terms but cannot be renewed. During the year ended December 31,2009, Cemig Distributionpurchased 1,806 GWh pursuant to these agreements, which represented 6.63% ofthe total electricity required by Cemig Distributionduring 2009.

 

**Other Businesses**

 

*Natural Gas Distribution*

 

Gasmig,was established in Minas Gerais, Brazil, in 1986 for the purpose of developingand implementing the distribution of natural gas in Minas Gerais. CEMIG holdsapproximately 55% of Gasmig and Petrobras, through its subsidiaryGaspetro—Petrobras Gas S.A., holds 40%. The remaining shares are owned by MinasGerais Participações S.A., or MGI, the investing body of the State Government,and by the city of Belo Horizonte.

 

InJanuary 1993, the State Government granted Gasmig an exclusive 30-yearconcession for distribution of natural gas covering the entire State of MinasGerais and consumers located within it. Gasmig’s marketing efforts focus on itsability to provide a more economically efficient and environmentally friendlyalternative to oil, liquefied petroleum gas, or LPG, and wood. In 2009, Gasmigsupplied approximately 1.5 million cubic meters of natural gas per day to 276consumers: 175 industrial and commercial clients, 93 retail distributionstations for natural gas vehicles, two thermal power plants and sixdistributors of compressed natural gas, or CNG. Gasmig supplied 0.2 millioncubic meters of gas per day to thermal power plants and 1.3 million cubicmeters of gas per day to retail consumers. In addition to serving theconventional market and the thermal power plants, Gasmig also supplied eightclients with re-gasified liquefied natural gas, or LNG. In 2009, Gasmigdistributed approximately 4.1% of all natural gas distributed in Brazil.

 

Gaspetroacquired its 40% equity interest in Gasmig pursuant to an Association Agreementdated August 25, 2004, among CEMIG, Gasmig, Gaspetro and Petrobras. Underthe terms of the Association Agreement, Petrobras agreed to make investments toexpand the capacity of the current pipelines connected to the Gasmigdistribution network and to construct new pipelines, and CEMIG and Gaspetroagreed to fund Gasmig’s capital expenditure plan to expand its distributionnetwork.

 

38

----

Tableof Contents

 

Thetransaction was implemented on December 15, 2004 when Petrobras, throughits subsidiaries Gaspetro and TSS, concluded its acquisition of a 40% equityinterest in Gasmig. On July 26, 2006, TSS was merged into Gasmig. As acondition to such investment, Petrobras and CEMIG entered into a ShareholdersAgreement in which CEMIG agreed with Petrobras and its subsidiaries to share inthe management of Gasmig. On December 15, 2004, Gasmig executed anadditional supply contract with Petrobras which guarantees a gradual increasein supply of up to 5.1 million m3/day of natural gas, in addition to the 3.5million m3/day that was previously contracted for. This additional supplyagreement is for the supply of natural gas to the regions of the *Vale do Aço* (Steel Valley) and the south of Minas Gerais,and also for expansion of service to the regions of the Greater Belo Horizontearea, the *Zona da Mata* (in the southeast of MinasGerais) and the *Campos das Vertentes* (historicregion), in the industrial, commercial, automotive and residential markets. Theadditional supply agreement has a term of 20 years, and we expect to begincommercial supply pursuant to the agreement in the second half of 2010, basedon market demand. Under this agreement the price will be established based onthe international oil price in the New York market.

 

Weexpect that the association with Petrobras will expand Gasmig’s distributioncapacity, as our ability to offer natural gas to our consumers is expected toincrease significantly with the implementation of Petrobras’s investments inpipelines. We expect that Gasmig’s capital expenditures for 2010 and 2011 willbe mostly used for the expansion of our distribution network in highlyindustrialized areas of Minas Gerais and in the residential segment. Gasmig hasalready begun the necessary expansions to serve the regions of the Steel Valleyand the southern region of the State of Minas Gerais.

 

Wedo not account for our interest in Gasmig as a consolidated investment in ourfinancial statements, in accordance with the Emerging Issues Task Force, orEITF, 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 also considered theFASB Interpretation No. 46R (“FIN 46R”), “Consolidation of VariableInterest Entities” and FASB Accounting Standards Update No. 2009-17 (“ASU 2009-17”), Improvementsto Financial Reporting by Enterprises Involved With Variable Interest Entities(originally issued as FASB Statement No. 167, Amendments to FASBInterpretation No. 46R). We consolidated Gasmig’s revenues and expensesfor the period from January 1, 2004 to December 15, 2004, the date ofthe sale of our 40.00% equity interest in Gasmig to Petrobras.

 

Otherthan with respect to the LNG supplied to Gasmig by a joint venture betweenPetrobras and White Martins Gases Industriais Ltda., or White Martins, Gasmigpurchases all its natural gas needs from Petrobras, and such natural gas ismainly provided by Petrobras’s own deposits. Our relationship with Petrobras isgoverned by two long term agreements, expiring in 2020 and 2028. The price Gasmigcharges its clients is based on the price charged by Petrobras plus a margin.Therefore, all cost increases in Gasmig’s purchase of natural gas are passed onto its clients through rates increases.

 

MinasGerais accounted for approximately 4.1% of the total natural gas consumption inBrazil in 2009. Many energy-intensive industries such as cement, steel,ferroalloys and metallurgy have significant operations in the state. Weestimate that the total demand for natural gas in Minas Gerais will amount to nearly3.6 million cubic meters of gas per day by 2012, which exceeds the availablesupply we project. Gasmig’s key strategy is to expand its distribution networkin order to serve the portion of the demand not yet reached. Gasmig is engagedin the development of new projects to extend its natural gas distributionsystems to reach consumers in other areas of Minas Gerais, mainly in heavilyindustrialized areas. In 2006, Gasmig began supplying natural gas to threeindustrial companies and two VNG retail distribution stations in the region ofthe Steel Valley, thus concluding the first phase of service to that region ofthe State of Minas Gerais. The average volume of natural gas distributed in thefirst phase was approximately 200,000 cubic meters/day. Gasmig accelerated thestart date to August 2006, providing service to the southern region of theState of Minas Gerais, through re-gasification of the LNG contracted withGásLocal, a joint venture of Petrobras and White Martins.

 

In2009, Gasmig had gross revenues of approximately R$557 million and net incomeof approximately R$77 million. We recognized R$42 million as income from Gasmigin 2009.

 

In2009, Gasmig invested approximately R$427 million in the expansion of its gaspipeline network to serve more clients in the State of Minas Gerais. The fundsto finance the expansion came primarily from its own cash flow and reinvestmentof the dividends payable to CEMIG. There were no changes in the Gasmig ́sshareholder structure. Currently, the natural gas pipeline which brings naturalgas from the Campos oil basin (State of Rio de Janeiro, Brazil) operates atfull capacity, and further investment by the Federal Government will benecessary to expand its capacity or construct a new pipeline to supply theanticipated growing natural gas demand in the State of Minas Gerais.

 

*Exploitation and Production of Crude Oil and Natural Gas*

 

On December 18, 2008, CEMIG and itspartners, Companhia de Desenvolvimento Econômico de Minas Gerais - Codemig, (“Codemig”)Comp Exploração e Produção de Petróleo e Gás S.A. (“Comp”), Sipet AgropastorilLtda. (“Sipet”) and Orteng Equipamentos e Sistemas Ltda. (“Orteng”),  participated in the Brazil Round 10 Auctioncarried out by the National Agency of Oil, Natural Gas and Biofuels (AgênciaNacional do Petróleo, Gás Natural e Biodiesel), or ANP, and was granted theexecution of 

 

39

----

Table of Contents

 

concessionagreements for four exploratory blocks (SF-T-104, SF-T-114, SF-T-120 andSF-T-127) in the São Francisco Basin, one block (POT-T-603) in the PotiguarBasin, and one block (REC-T-163) in the Recôncavo Baiano Basin. On June 30,2009, the consortia formed by CEMIG, Codemig, Comp, Sipet, and Orteng signedthe concession agreements regarding the blocks SF-T-120, SF-T-127 andPOT-T-603.  The participation of bothCEMIG and Codemig is 24.5% each. The total participation of Comp, Sipet, andOrteng is 51%, but the individual participation of these three companiesvaries, depending on the block. In the near future, CEMIG, Codemig e ImetameEnergia S.A. (presently called Comp Exploração e Produção de Petróleo e GásS.A.) will form a consortia to be responsible for the concession agreementsregarding the blocks SF-T-104, SF-T-114 and REC-T-163. The three consortia willhave the same composition: CEMIG — 24.5%, Codemig — 24.5%, and Imetame — 51%.CEMIG’s projected investment is not expected to exceed R$30 million in theexploitation phase.

 

*Telecommunications, Internet and Cable Television*

 

OnJanuary 13, 1999, Empresa de Infovias S.A. , currently designated as CemigTelecomunicações S.A., was incorporated in Minas Gerais, Brazil, as a jointventure with AES Força Empreendimentos Ltda., an affiliate of AES CorporationGroup. Currently, we own an equity interest of 99.9% in the capital stock ofCemig Telecomunicações S.A., which has an optical fiber-based long-distancecommunications backbone installed along our power grid using optical groundwire cables. This communications backbone is connected to an access networkthat is based on hybrid fiber-coaxial cable technology and is deployed alongour power grid. Pursuant to Brazilian telecommunications law, we also make ournetwork infrastructure available to other telecommunications providersinterested in leasing it.

 

CemigTelecomunicações S.A. started its business operations in January 2001. Themain telecommunication services provided by Cemig Telecomunicações S.A. throughits network are signal transportation and access, both for point-to-point andpoint-to-multipoint applications, delivered mainly to telecommunicationsoperators and Internet service providers on a clear channel basis. CemigTelecomunicações S.A. is also extending its broadband Internet services,currently available in the cities of Belo Horizonte, Poços de Caldas,Barbacena, Contagem, Sete Lagoas, Ipatinga and Uberaba, to other cities inMinas Gerais.

 

CemigTelecomunicações S.A. provides the network for cable television service in 12cities in Minas Gerais pursuant to a 15-year service agreement, that expires onDecember 31, 2015, with WAY TV Belo Horizonte S.A. (“OITV”), and BrasilTelecomunicações S.A., each a holder of concessions to provide cable televisionand Internet service in certain cities in Minas Gerais, under which CemigTelecomunicações S.A. allows these companies to use its network infrastructure.In return, Brasil Telecomunicações is obligated to deliver to CemigTelecomunicações S.A. a percentage of the revenues derived from their cabletelevision and Internet services and OITV pays per kilometer of the networkused.

 

CemigTelecomunicações S.A. also provides intra-company data transmission services tous pursuant to a five-year agreement signed in 2001 and renewed inOctober 2007. We use this servicefor internal communications as well as for certain communications with ourconsumers.

 

Pursuantto an authorization issued in 2009 by the National Telecommunications Agency (“ANATEL”), Cemig TelecomunicaçõesS.A. was permitted to promote fixed phone service (serviço telefônico fixocomutado) (“STFC”) in local and national long distance modalities.

 

In 2009, Cemig Telecomunicações S.A.’s grossrevenues were R$119.0 million, while its net income was R$28 million.

 

CemigTelecomunicações S.A.’s capital expenditures for the past five years were anaggregate of R$118.2 million, and its capital expenditures for 2010 areexpected to be mostly used for expansion of its telecommunications network.

 

*Consulting and Other Services*

 

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

 

OnJanuary 9, 2002 we created Efficientia S.A., or Efficientia, in MinasGerais, to provide project efficiency optimization solutions and operationaland management services to energy supply facilities. We have a 100% interest inEfficientia, which began operating in 2003. Efficientia has increased itsmarket share and revenues in the Brazilian market for specialized consultancyservices every year since it began operations. Such services includeconsultancy in the areas of efficiency, energy solutions, reduction ofnon-technical losses in other electricity distribution concession holders andthe provision of preventive maintenance services.

 

40

----

Table of Contents

 

In2009, Efficientia had net income of R$5.3 million. Efficientia’s gross revenuesin 2009 were R$11.6 million, a 8.8% increase from 2008. This increase in grossrevenue was accompanied by operational costs of R$4.3 million, about 31% higherthan in 2008. Highlights of the consultancy projects of Efficientia in 2009include implementation of a cogeneration power plant that uses residual gasfrom pig iron facilities operations and energy savings solutions for twofacilities. In addition, Efficientia signed contracts to implement two newcogeneration power plants and to replace all incandescent bulbs in trafficlights in Belo Horizonte with LED lamps. The consultancy projects also includedthe connection of three cogeneration power plants to Cemig Distribution’s grid,which will permit injection of surplus energy generated by ItuiutabaBioenergia; Usina Monte Alegre; and Usina Cerradão (sugar and alcoholcompanies) into Cemig Distribution’s grid. The power plants generate 100% cleanand renewable energy.

 

Inpartnership with Concert Technologies S.A. (“Concert”),  Nansen S.A. Instrumentos de Precisão (“Nansen”),Leme Engenharia Ltda (“Leme”) and FIR Capital Partners Ltda (“FIR”), we createdFocus Soluções Tecnológicas S.A. in August 27, 2007, which name waschanged in 2008 to Axxiom Soluções Tecnológicas S.A. (“Axxiom”), to offersolutions in technology and systems for operational management of publicservice concession holders, including electricity, gas, water, and sewerage andother public utility companies. We have a 49% interest in Axxiom, which beganits operations in the second quarter of 2008. In 2009, Axxiom recorded lossesof R$1.2 million. On June 11, 2010, CEMIG signed, as consenting party, aprivate instrument of assignment of shares for consideration and othermatters  between Light and the companiesConcert, Leme, Nansen and FIR, (“the Controlling Group”), for acquisition ofits 51% interest in Axxiom.

 

Inaddition, The Strategic Technology Management Center (*Centro deGestão Estratégica de Tecnologia*) (“CGET”), created in 2005, as anon-profit entity whose objectives include studies and research, development ofalternative technologies, production of technical and scientific informationand knowledge, encouragement of industrial development measures, plans andprograms, projects for research and incorporation of developed or adaptedtechnological innovations, and implementation of centers of excellence andinstitutions for the development of studies and provision of technologicalservices.

 

**Energy Losses**

 

Werecognize energy losses in connection with our operations on the national basicgrid, which is operated by the ONS, referred to as the Basic Grid. These energylosses are divided into “technical” and “non-technical” losses.

 

CemigDistribution total energy losses in 2009 were 5,609 GWh, compared to 5,790 GWhin 2008. Of this total in 2009, 411 GWh were related to losses in the BasicGrid attributed to CEMIG by the National Integrated System Operator (*Operador Nacional do Sistema*, or ONS). The remaining 5,198GWh were both technical and non-technical losses in the local distributionsystem of Cemig Distribution and represent 11.6% of the total energy (44,938GWh) that passed through the local system.

 

Technicallosses accounted for approximately 80% of our energy losses in the localdistribution grid in 2009. These losses are the inevitable result of thestep-down transformation process and the transportation of electric energy. Weattempt to minimize technical losses by performing rigorous and regularevaluations of the quality of our electricity supply and our facilities. Weroutinely upgrade and expand our transmission and distribution systems in orderto maintain quality and reliability standards, and consequently, reducetechnical losses. In addition, we operate our transmission and distributionsystems at certain specified voltage levels in order to minimize losses.

 

Technicallosses are not comparable. Longer stretches of distribution (for example inrural areas) naturally have more technical losses.

 

Non-technicallosses accounted for the remaining approximately 20% of our energy losses in2009 in the distribution grid and result from fraud, illegal connections,metering errors and meter defects. In order to minimize non-technical losses,we regularly take preventive actions, including inspection of consumers’ metersand connections, modernization of metering systems, training of meter-readingpersonnel, standardization of meter installation and inspection procedures,installation of meters with quality control warranties, consumer databaseupdating and development of a theft-protected distribution network.

 

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

 

Non-technicallosses are partially comparable between electricity companies because theyindicate a sector’s inefficiencies and the social complexities within theconcession area. At the end of 2009, the indicators that measure the quality ofsupply by Cemig Distribution,DEC—Consumer Outage Duration in hours per year and FEC—Number of Outages PerYear, were 14.09 and 6.75, respectively, compared to 13.65 and 6.53 in 2008.

 

41

----

Table of Contents

 

**Consumers and Billing**

 

*Consumer Base*

 

Ourdistribution and generation business consumers, who are located within ourconcession area in Minas Gerais and outside the state, are divided into fiveprincipal categories: industrial (including mining, manufacturing andprocessing activities); residential; commercial (including service-orientedbusinesses, universities and hospitals); rural; and other (includinggovernmental and public entities). During the year ended December 31,2009, electricity invoiced totaled 39,651 GWh, which includes the energy soldby Cemig Distribution, Cemig Generation and Transmission and byaffiliated companies.

 

For2009, as compared to 2008, the volume of electric power sold to residential andcommercial consumers increased by 8.5% and 5.7%, respectively, and the volumeof electric power sold to rural consumers decreased by 3.8%. The other consumercategory grew 1.3% (this excludes wholesale supply). The industrial consumptiondecreased by 15.6% from 2008 to 2009. The following table provides informationregarding the number of our consumers as of December 31, 2009 andconsumption by consumer category for the years ended December 31, 2009,2008 and 2007.

 
| ** **                 | ** ** | **Number of**                       | ** ** | **Consumption (GWh)**              | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | **consumers at  December 31,** | ** ** | **Years ended  December 31,** | ** ** |
| **Consumer Category** | ** ** | **2009**                                 | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Industrial                 |       | 75,180                                   | (1)        | 22,113                             | (2)        | 26,198 | (2) | 24,183 | (2) |
| Residential                |       | 5,601,926                                |       | 7,774                              |       | 7,164 |   | 6,813 |   |
| Commercial                 |       | 596,290                                  |       | 4,674                              |       | 4,423 |   | 4,111 |   |
| Rural                      |       | 490,140                                  |       | 2,208                              |       | 2,296 |   | 2,200 |   |
| Own consumption            |       | 824                                      | (3)        | 35                                 |       | 35 |   | 34 |   |
| Other                      |       | 68,168                                   | (4)        | 2,846                              |       | 2,810 |   | 2,738 |   |
| Total                      |       | 6,832,528                                |       | 39,651                             |       | 42,926 |   | 40,079 |   |

 

----

(1)                                Includessubsidiaries and affiliated companies.

(2)                                The industrialconsumer category includes consumption by CemigDistribution, CemigGeneration and Transmission, Sá Carvalho S.A., Usina Térmica IpatingaS.A., Horizontes Energia S.A., Cemig PCH S.A.,Usina Termelétrica Barreiro S.A and PCH Cachoeirão.

(3)                                Refers to thenumber of our plants, facilities and offices that use our energy, each of whichis considered a consumer pursuant to ANEEL regulations.

(4)                                Does notinclude consumption through supply to other concessionaires.

 

In2009, we added and billed 230,267 new final consumers, representing an increaseof 3.5% compared to 2008, through the expansion of our transmission anddistribution systems.

 

Alarge proportion of our energy is sold to large industrial consumers.  In 2009, 165 of our clients served at mediumand high voltages consumed 16,227 GWh, or 41.9% of the total of electricitythat we supplied in the whole year. These clients provided 17.2% of our sales revenue from supply ofelectricity in 2009.  Our power purchaseagreements with industrial consumers have terms of three to eight years in average (a few can reach 10 to 20years) and contain a “take or pay” clause for the energy and a minimum demandclause that requires the consumer to pay at least for the contracted demand,which represents the system capacity reserved for that consumer, as well as the“take” energy contracted. We believe that this billing method provides us arelatively stable source of revenue.

 

Thefollowing table shows our industrial energy sales volumes by type of industrialconsumer as of December 31, 2009:

 
| **Industrial Consumers  (1)** | ** ** | **Energy Sales Volume  in GWh** | ** ** | **Consumption as a  Percentage of Total  Industrial Energy  Volume** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Steel industry                     |       | 5,974                                     |       | 27                                                                                                 | %          |
| Ferroalloy industry                |       | 3,979                                     |       | 18                                                                                                 | %          |
| Chemical industry                  |       | 1,801                                     |       | 8                                                                                                  | %          |
| Non-ferrous metal industry         |       | 1,072                                     |       | 5                                                                                                  | %          |
| Mining industry                    |       | 1,930                                     |       | 9                                                                                                  | %          |
| Food processing                    |       | 1,505                                     |       | 7                                                                                                  | %          |
| Cement industry                    |       | 946                                       |       | 4                                                                                                  | %          |
| Others                             |       | 4,906                                     |       | 22                                                                                                 | %          |
| Total                              |       | 22,113                                    |       | 100                                                                                                | %          |

 

----

(1) The industrial consumer category includesconsumption by CemigDistribution, Cemig Geração andTransmissão, Sá Carvalho S.A., UsinaTérmica Ipatinga S.A., Horizontes Energia S.A., Cemig PCH S.A., UsinaTermelétrica Barreiro S.A and PCH Cachoeirão.

 

42

----

Table of Contents

 

Thefollowing table sets forth the names and related industries of our ten largestconsumers in 2009:

 
| **Ten Largest Consumers  (listed in order of total GWh of electricity billed  by us in 2009)** | ** ** | **Industry** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Usinas Siderúrgicas de Minas Gerais S.A.-  USIMINAS ( Cubatão - SP )                                                                                  |       | Steel        |
| Usinas Siderúrgicas de Minas Gerais S.A.-  USIMINAS ( Ipatinga - MG )                                                                                      |       | Steel        |
| ArcelorMittal  Brasil S.A.                                                                                                                                      |       | Steel        |
| ArcelorMittal Inox Brasil S.A.                                                                                                                                  |       | Steel        |
| Gerdau Açominas S.A.                                                                                                                                       |       | Steel        |
| Companhia Brasileira de Carbureto de Cálcio -  CBCC                                                                                                        |       | Ferroalloys  |
| Ligas de Alumínio S.A.- LIASA                                                                                                                              |       | Ferroalloys  |
| Italmagnésio  Nordeste S.A.                                                                                                                                |       | Ferroalloys  |
| Rima  Industrial S.A.                                                                                                                                           |       | Ferroalloys  |
| Companhia Ferroligas Minas Gerais -  MINASLIGAS                                                                                                                 |       | Ferroalloys  |

 

Asa result of our strategy of offering differentiated solutions in accordancewith the demand for electricity from Free Consumers, especially considering thedecrease in industrial activity as a result of the international financialcrisis, Cemig Generation and Transmission negotiated temporary reductions inthe amounts contracted in the year 2009, and these amounts were resold in theRegulated Market. This action avoided financial losses for the Free Consumers,who are subject to settlement of any excess energy in the spot market at muchlower prices than those of the contract, and generating additional revenue forCEMIG and also provided extra revenue for Cemig Generation and Transmission asthe price sold to the Regulated Market was higher than the price of theoriginal amounts that were temporarily reduced.

 

In 2008, we entered into two relevant groups ofcontracts with large Free Consumers. The first group of contracts was with theVotorantim Group, through which we will provide variable amounts of energy,from the current 145 average MW up to 670 average MW in some years. The totalamount of this group of contracts is approximately R$10.5 billion, and willexpire in 2028. These contracts are expected to generate revenue to CEMIG ofapproximately R$500 million per year through their expiration in 2028. Thesecond group of contracts was signed on May 26, 2008, with theArcelorMittal Group, for the provision of up to 313.5 average MW (twice thevolume we currently provide to the ArcelorMittal Group). The total amount ofthis second group of contracts is approximately R$4.4 billion and will expirein 2020. This group of contracts is expected to generate revenue to CEMIG ofapproximately R$360 million per year through the expiration of the contracts in2020.

 

*Billing*

 

Ourmonthly billing and payment procedures for electricity supply vary by levels ofvoltage. Our large consumers with direct connections to our transmissionnetwork are generally billed within five weekdays after their meter reading.Payment is required within five weekdays after delivery of the bill. Otherconsumers receiving medium voltage electricity (approximately 11,000 consumerssupplied at a voltage level equal to or greater than 2.3 kV or connected byunderground distribution lines) are billed within one or two days of theirmeter reading and payment is required within five weekdays after delivery ofthe bill.

 

Ourremaining consumers are billed within five weekdays of their meter reading andpayment is required within five weekdays after delivery of the bill or 10weekdays after delivery of the bill in the case of public sector entities.Bills are prepared from meter readings or on the basis of estimatedconsumption.

 

*Seasonality*

 

Oursales of electricity are affected by seasonality. Usually, an increase inconsumption by industrial and commercial consumers occurs in the fourth fiscalquarter due to increases in their activities. The seasonality of ruralconsumption is usually associated with rainfall periods.  During the dry season, between the months of May andNovember, more electricity is used to irrigate crops.** **Certain figures representingfiscal quarterly consumption by final consumers from 2007 through 2009, in GWh,are set forth below:

 
| ** **        | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|-------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| 2007 (1) (2) |       | 9,337                  |       | 10,016                  |       | 10,238                 |       | 10,488                  |       |
| 2008 (1) (2) |       | 9,948                  |       | 10,438                  |       | 11,312                 |       | 11,228                  |       |
| 2009 (1) (2) |       | 9,754                  |       | 9,711                   |       | 9,940                  |       | 10,246                  |       |

 

----

(1)                                Includesconsumption by Cemig Distribution, Cemig Generation and Transmission, Sá CarvalhoS.A., Usina Térmica Ipatinga S.A., Usina Térmica Barreiro S.A., Cemig PCH S.A. and Horizontes Energia S.A.

(2)                                Does notinclude supply to other concessionaires.

 

43

----

Table of Contents

 

**Competition**

 

*Contracts with Free Consumers*

 

Wehad 167 contracts with Free Consumers as of December 31, 2009. Of thesecontracts, 18  are with companies locatedoutside the distribution company’s concession area and represent 1,946 GWh ofenergy per year. These contracts with Free Consumers have terms of three toeighteen years and represent a total volume of approximately 17,384 GWh/year.

 

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

 

Atthe end of 2009 we were the largest seller of energy to Free Consumers in theFree Market, with a market share of 24% of this segment in CCEE. .

 

*Concessions*

 

Eachconcession that we currently hold is subject to a competitive bidding processupon its expiration. However, in accordance with the Concessions Law, existingconcessions may be extended by the Federal Government without a bidding processfor an additional period of up to 20 years upon application by theconcessionaire, provided that the concessionaire has met minimum performancestandards and that the proposal is otherwise acceptable to the FederalGovernment. On September 22, 2004,we applied to ANEEL for a 20-year extension of the concessions of theEmborcação and Nova Ponte hydroelectric plants. On June 14, 2007,the Federal Government approved the extension of the concessions of these powerplants for a period of 20 years from July 24, 2005. The related concessioncontract was amended on October 22, 2008 to reflect the extension grantedto Cemig Generation andTransmission.

 

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

 

**Raw Materials**

 

Wateris our main raw material used for the production of energy, representing 97% ofthe total raw materials used. Our principal raw material expense is thepurchase of fuel oil, which is consumed by our three thermoelectric plants inthe electricity generation process. Fuel oil consumption for the year endedDecember 31, 2009 represented an expense of R$4 million. See “—TheBrazilian Power Industry—Regulatory Charges” and “Item 5. Operating andFinancial Review and Prospects.” We believe that supplies of fuel oil are readilyavailable.

 

**EnvironmentalMatters**

 

*Overview*

 

Ourgeneration, transmission and distribution activities are subject tocomprehensive federal and state legislation relating to the preservation of theenvironment. The Brazilian Constitution gives the Federal Government, statesand municipalities powers to enact laws designed to protect the environment andissue enabling regulations under these laws. While the Federal Government hasthe power to promulgate general environmental regulation, state governmentshave the power to enact specific and even more stringent environmentalregulation. A violator of applicable environmental laws may be subject toadministrative and criminal sanctions, and will have an obligation to repairand/or provide compensation for environmental damages. Administrative sanctionsmay include substantial fines (from R$50 to R$50 million) and suspension ofactivities.  Criminal sanctionsapplicable to legal entities 

 

44

----

Table of Contents

 

mayinclude fines and restriction of rights, whereas, for individuals, they mayinclude imprisonment, which can be imposed against executive officers andemployees of companies that commit environmental crimes.

 

Ourenvironmental impact studies are prepared by multi-disciplinary teams, whichanalyze the environmental impacts of our projects and propose solutions tominimize their effects on the environment. Applicable law in Brazil requiresthat licenses be obtained in connection with the construction, installation,expansion and operation of certain types of facilities.

 

Webelieve that we are in compliance with the relevant laws and regulations  in their material aspects.

 

Weare certified under the Cemig Environmental Management System (“EMS”) for ouroperations in many municipalities, our materials storage and our logisticswarehouses.

 

Atthe end of 2009, the following plants were certified under the EMS:  Camargos, Salto Grande, Volta Grande,Jaguara, Três Marias, Emborcação, and Igarapé—and the following were certifiedunder ISO 14001: São Simão, Miranda, Rosal, Irapé, Nova Ponte andItutinga. Together, these plants represent 5,767 MW of CEMIG’s installedcapacity, and bring the percentage of CEMIG’s generating plant that iscertified to 86%.

 

Inaccordance with our environmental policy, we have established various programsfor prevention and control of damage, aiming to limit our risks related toenvironmental issues.

 

In2009, we invested approximately R$27.7 million in environmental complianceprojects for plant and equipment and in the implementation of new projects, andalso spent R$60.7 million on operational and maintenance expenses for ourcurrent activities, such as final disposal of waste, putting environmentalmanagement systems in place, audits, planting of riverside forests, fishcultivation, putting tree pruning and oil policies in place, environmentaleducation programs, maintenance of conservation units, training and otheractivities. We also invested R$2.2 million in environmental research anddevelopment projects carried out jointly with universities and researchinstitutes.

 

*Environmental Licensing*

 

Brazilianlaw requires that licenses be obtained for construction, installation,expansion and operation of any facility that utilizes environmental resources,causes environmental degradation, or pollutes or has the potential to causeenvironmental degradation or pollution or to harm archaeological heritage.Usually, governments of individual states manage the environmental licensingprocess for facilities that are expected to impact only that state. The FederalGovernment manages the environmental licensing process for facilities that areexpected to have an environmental impact on more than one state and/or arelocated in two or more states.

 

Failureto obtain an environmental license to construct, implement, operate, expand orenlarge an enterprise that causes significant environmental impact, such as theenergy plants operated and in implementation by CEMIG, is subject toadministrative sanctions, such as the suspension of activities and the paymentof a fine, ranging from R$500 to R$50 million, as well as criminal sanctions,which include the payment of a fine, imprisonment for individuals andrestriction of rights for legal entities.

 

TheState of Minas Gerais Environmental Policy Council (*Conselho dePolítica Ambiental)*(“COPAM”) Regulatory Ordinances Nos. 17, ofDecember 17, 1996, and 23, of October 21, 1997, provide thatoperational licenses shall be renewed from time to time for periods of four toeight years, depending on the size and pollution potential of the facility.

 

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

 

*Corrective Environmental Operation Licensing*

 

ResolutionNo. 6, of September 16, 1987, issued by the Environmental NationalCouncil (*Conselho Nacional do Meio Ambiente*) orCONAMA, requires environmental impact assessment studies to be undertaken, anda corresponding environmental impact assessment report to be prepared, for allmajor electricity generation facilities built in Brazil after February 1,1986. Facilities built prior to February 1, 1986 do not require thesestudies, but must obtain corrective environmental operation licenses, which maybe acquired by filing a form containing certain information regarding thefacility in question. Obtaining the corrective licenses for the projects whichbegan operations before February 1986 requires presentation to thecompetent environmental body of an environmental

 

45

----

Table of Contents

 

report containing the characteristics of the project,the environmental impacts of the construction and operation, and also themitigating and compensatory measures adopted or that are in the process ofbeing adopted by the organization carrying out the project.

 

Federal Law No. 9,605, of February 12, 1998,sets penalties for facilities that operate without environmental licenses. In1998, the Federal Government issued Provisional Measure 1,710 (currentlyProvisional Measure 2,163/41), which allows project operators to enter intoagreements with the relevant environmental regulators for the purpose of cominginto compliance with Federal Law No. 9,605/98. Accordingly, we have beennegotiating with the Environmental and Natural Renewable Resources BrazilianInstitute (*Instituto Brasileiro do MeioAmbiente e dos Recursos Naturais Renováveis*) (“IBAMA”) and theEnvironmental Foundation (*Fundação Estadualdo Meio Ambiente*)**(“FEAM”)of the State of Minas Gerais to obtain the corrective environmental operationlicensing for all our plants that began operating prior to February 1986.Generation facilities located within the State of Minas Gerais fall within thejurisdiction of FEAM for purposes of corrective licensing. We have agreed withFEAM to bring our facilities located in Minas Gerais into compliance on agradual basis. We do not currently anticipate any costs and commitments inconnection with any recommendations that may be made by IBAMA and FEAM.

 

Currently, those Cemig Generation and Transmissionfacilities that started operations before the Brazilian environmentallegislation was passed, and which have not obtained corrective licensing, havenow filed applications before the appropriate environmental bodies.

 

We currently have operating licenses for the followingfacilities: (i) hydroelectric plants: São Simão, Aimorés, Amador Aguiar I,Amador Aguiar II, Igarapava, Irapé, Itutinga, Miranda, NovaPonte, Porto Estrela, Rosal, Funil, Queimado, Sá Carvalho and Baguari; (ii)small hydroelectric plants: Joasal, Paciência, Gafanhoto, Pai Joaquim, Rio dePedras, Santa Luzia, Salto dos Moraes, Poquim and Piçarrão;(iii) thermoelectric plants: Barreiro and Formoso; (iv) the Morro doCamelinho wind power plant and the Praias de Parajuru wind farm; and(v) the Transmission System of the Eastern Region of the State of MinasGerais. In 2009, Cemig obtained corrective operational licenses for theTriangle, East and Southeast Regional Transmission Systems. Nevertheless, itmust be observed that some of these licenses are not currently valid and dependon a renewal process, such as the ones related to Aimorés, Irapé, Rosal,Pai Joaquim, Sá Carvalho, whereas others shall be renewed during 2010, such asItutinga, Santa Luzia, Salto Moraes, Piçarrão.

 

Some of the renewalprocesses of our environmental licenses conducted at the environmental agencyof the State of Minas Gerais depend on the decisions regarding Legal ForestReserves. See “—Legal Forest Reserves.”

 

Distribution of natural gas by Gasmig throughpipelines in Minas Gerais is also subject to environmental control. We believethat all licenses for the regular operation of Gasmig’s activities have beenobtained.  The environmental licenses foroperation of the Natural Gas Distribution Network were duly issued by FEAM.

 

The environmental licenses issued by state or federalbodies are subject to certain conditions imposed in light of foreseenenvironmental impacts. In extreme circumstances, failure to comply with theseconditions may result in revocation of the license. We believe we are incompliance with the requirements mentioned in our licenses. Environmentallicenses are obtained subject to conditional requirements that have to be metduring the period of their validity. Non-compliance with these conditionalrequirements can result in administrative penalties, including fines and therepeal of the environmental license. CEMIG has been complying with the demandsof the environmental conditions of its licenses and periodically sends reportsto the environmental regulatory authorities.

 

**Legal Forest Reserves**

 

Under Article 1o, § 2o, sub-item III, of FederalLaw No. 4,771, of September 15, 1965 (the Federal Forest Code), aLegal Forest Reserve is an area located inside a rural property or holding,other than any area of permanent preservation, that is necessary for thesustainable use of natural resources, conservation or rehabilitation ofecological processes, conservation of biodiversity or shelter or protection ofnative fauna and flora.

 

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

 

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

 

46

----

Table of Contents

 

In the federal sphere, IBAMA’s technical licensingteam, in the corrective licensing of CEMIG’s plants, expressed an opinion, incorrespondence sent to the Company, on July 29, 2008, taking a positionagainst the need for the constitution of a Legal Forest Reserve.

 

In the State of Minas Gerais, with the objective ofdeciding whether the obligation to constitute a Legal Forest Reserve applies toundertakings of the electricity sector, a Legal Opinion was issued by theOffice of the General Attorney of the State of Minas Gerais, or AGE, on October 30,2008, in response to a consultation from the Minas Gerais State Environment andSustainable Development Department, or SEMAD, and the State’s EconomicDevelopment Department, or SEDE, presenting the opinion that “allocation of aLegal Forest Reserve is obligatory for undertakings of the electricity sector,both for those under construction and for those to be put in place in thefuture.”

 

Grounded on different legal opinions, SEDE submitted anew consultation to the AGE, requesting a revision of the said Legal Opinion.

 

In agreement with the opinion put forward by SEDE,CEMIG supports the view that it is not obligated to constitute a Legal ForestReserve for its undertakings, based on the following arguments:

 

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

 

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

 

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

 

4.               The principle of *non bis in idem* cannot thus be violated.Such an obligation would characterize a double charge imposed on concessionholders.

 

CEMIG has submitted its justifications to SEDE,presenting the arguments in opposition to the said obligation of establishingLegal Forest Reserves.

 

Todate, SEDE has not yet responded to CEMIG’s request. The results of thisprocess cannot currently be predicted.

 

*Compensation Measures*

 

According to Federal Law No. 9,985, ofJuly 18, 2000, and corresponding Decree No. 4,340, of 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. Each company shall have its environmental compensation stipulated bythe relevant environmental agency, depending on the specific degree ofpollution or harm to the environment resulting from its activities.

 

Federal Decree No. 6,848/2009, issued onMay 14, 2009, and State of Minas Gerais Decree No. 45.175, issued onSeptember 17, 2009, regulate the methodology for defining compensationmeasures. Accordingly, up to 0.5% of the total amount invested in theimplementation of a project that causes significant environmental impact mustbe reverted for compensation measures. The exact amount of compensationmeasures will be defined by the environmental agency, based on the project’sspecific degree of pollution and environmental harm.

 

47

----

Table of Contents

 

This Federal Decree also indicated that thecompensation charge applies to projects implemented before the issuance of thenew legislation. We have not yet assessed the effects such legislation willhave on CEMIG, however, its enforcement would result in additional costs forour operations.

 

*Fishways*

 

Among other environmental programs, we are operatingand developing the Fishways program. The dams at each of our hydroelectricgeneration facilities can endanger fish that inhabit the adjoining reservoirs.To reduce the impact of these facilities, fish that pass through our dams willbe redirected to fishways, through which they can pass safely. Currently, forSalto Moraes, Igarapé, Funil, Baguari, Aimorés and Igarapava plants,fishways facilities have already been implemented by CEMIG and its partners

 

There has been no final decision by the environmentalauthorities regarding the obligation of building fishway projects atCEMIG’s hydroelectric plants; however, there is a possibility that futuredecisions by the environmental authorities, changes in the environmentallegislation, or even new information obtained from the studies that arecurrently in progress may lead to a need for the construction of fishwaysat all of CEMIG’s hydroelectric plants, which, in its turn, may causeadditional costs for CEMIG’s operations, that have not yet been assessed.

 

*Fish Management*

 

In view of its policy for environmental conservationand sustainable development, CEMIG carries out numerous procedures to mitigateaccidents involving fish in its hydroelectric power plants, such as use ofsonar and counting to detect shoals; monitoring of oxygen in solution; and useof teams of professional divers to assess shoals during activities with greaterenvironmental risk, such as startup and shutdown of rotors. Also, we arecurrently developing research projects in partnership with universities tostudy more effective techniques to control the impact of our operations onfish.

 

In spite of these efforts, two incidents occurred, onein 2006 and one in 2007, at the Três Marias Hydroelectric Power Plant,resulting in the death of approximately 17 tons of fish in 2007 due to lack ofoxygenation, according to the State Forests Institute and estimates by theEnvironmental Police (8.2 tons by our estimate). The volume of dead fish wasnot estimated or measured in 2006. As a result, the State Forests Instituteimposed two fines on us, totaling approximately R$5.5 million, which currentlycorresponds to R$ 7.7 million. We paid 50% of the fine and the rest is beingnegotiated with the environmental authority for application in researchprojects. On April 8, 2010, CEMIG and the Public Attorneys’ Office ofMinas Gerais State signed a Conduct Adjustment Commitment (TAC), correspondingto the amount of R$ 6.8 million, providing for compensatory measures related tothe occurrence of fish deaths, measures for prevention of leakage of oil, andmeasures for environmental improvement in the area of influence of the TrêsMarias power plant, in Três Marias, Minas Gerais.

 

Although the amount is not a material liability forus, we are implementing an environmental project, named Live Fish (*Peixe Vivo*) in the affected region as away of responding to the event and reaffirming our commitment to economic andsocial development of the regions where we operate and where our projects arelocated. Fish in the exit canals of several of our plants are being monitoredby specialist biologists, with the objective of becoming familiar with thedynamics of fish populations over time, the periods of their greatest activityduring the day, and the locations of their greatest density. With thisinformation, more effective techniques may be developed to control the impactof the operation of the plants on fish. CEMIG has spent R$4.2 million in 2009for the development of research projects linked to the Peixe Vivo program.

 

In 2008, two research projects were contracted forcontinuous monitoring of fish densities and environmental conditions instrategic stretches of the drainage basins influenced by CEMIG’s plants;studying of aspects of the biology (reproduction, feeding, distribution,migration, etc.) of the fish species most affected by the procedures ofmaintenance of the generating units; creation of standardized databases for theinformation generated by the monitoring of the fish populations that will becarried out at CEMIG’s plants; determination of temporal and spatial variationsin the abundance of fish upstream from the plants and correlation with thewater flow and quality factors that can govern their behavior, making itpossible to take measures to reduce the risk of accidents from fish enteringsuction tubes, and also to facilitate the appropriate choice of locations forfish transposition mechanisms.

 

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

 

In October 2007, at the end of a long drought,fish deaths occurred in a lake associated with the Pandeiros River, 31 milesdownstream from the Pandeiros plant. Since the area is downstream from thePandeiros plant, the Minas Gerais State Forests Institute 

 

48

----

Table of Contents

 

associated the problem with the operation of theplant, and, together with the Minas Gerais State Public Attorneys’ Office,brought a legal action against CEMIG to provide technical explanations aboutthe event. In accordance with State Forests Institute Notice No. 251016,of October 18, 2007, the Pandeiros plant was indicted and its operationswere ceased.

 

CEMIG hired specialists who issued two technicalreports to assess the matter, from the points of view of river flows and fishpopulations, and sent these studies to the State Forests Institute and to thePublic Attorneys’ Office for consideration. Both reports concluded that thefish deaths resulted from natural causes arising from the natural dynamics ofthe Pandeiros River, relieving CEMIG of any responsibility for the events.Nevertheless, CEMIG entered into a Commitment Agreement (*Termo de Compromisso*,**or “TC”) with the State Forests Instituteand to the Public Attorneys’ Office. The TC sets forth several measures thatmust be adopted by CEMIG, amounting to R$8 million over 10 years. Among themeasures provided for in the TC, there is the management of a Conservation Unit(*Unidade de Conservação,*or “UC”)and the establishment of a consensual solution for the lawsuit filed by the MP.

 

Operations at the Pandeiros plant have not yet beenresumed, and the competent environmental agency refused to grant the correctiveenvironmental operation license for this facility, on September 19, 2008.

 

**Urban Occupation of Rights of Way andReservoir Banks**

 

*Gas Pipelines —* Our piped natural gas distributionnetworks are underground, crossing through inhabited areas, and using publicrights of way in common with underground piping utilities operated by otherpublic concession holders and public agencies. This increases the risk ofunauthorized work without prior communication and consultation of our naturalgas distribution network registers, and there is a possibility of this causingaccidents, with potentially significant personal, property and environmental damage.However, all our gas networks are explicitly, and intensively, marked andsignaled. Gasmig, through its Dig Safely (*Escavecom Segurança)*program, has been building partnerships with thecommunity, mainly with public authorities and holders of concessions, inaddition to the companies which carry out digging in public rights of way, toensure that before digging close to the natural gas network, they telephoneGasmig’s 24-hour helpline and request support for safe execution of their work.

 

*Transmission Lines*— Several of the areas to which we have aright of way in relation to our transmission lines have been occupied byunauthorized facilities (buildings, etc.) and dwellings. These occupationsgenerate risks of electric shock and accidents involving people living at thelocation and constitute an obstacle for the maintenance of our electricitysystem. 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 safely and efficiently maintain our electricity system with theseoccupations intact. Faced with the risks associated with this situation, wehave planned two approaches for the coming years. The first is preparation of areport entitled “Diagnosis of areas invaded and under risk of invasion, forstrengthening of inspection activities, including installation of improvementsin locations classified as having high invasion risk,” for which CEMIG isidentifying the areas with potential for invasion and making possible decisionson measures and procedures in relation to the control, monitoring andinspection of the transmission line paths where there is a high risk ofinvasion. The second line of action involves the evacuation of areas alreadyinvaded. The removal of people from these areas involves payment ofindemnities, regularization of electricity connections and the opening of areasfor the construction of parks and streets.

 

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

 

**The Carbon Market**

 

We believe Brazil has significant potential togenerate Carbon Credits arising from clean energy projects that comply with theClean Development Mechanism, or CDM. Every year, we seek to quantify ouremissions and to publish our main initiatives in reduction of greenhouse gasemissions, by means, for example, of the Carbon Disclosure Project.

 

In addition, through Efficientia, a service companycontrolled by us, we are developing three projects for the CDM, inco-generation of electricity from blast furnace gases in the steel sector. Oneof these projects is being developed with Siderúrgica Pitangui, and is at thephase of approval and registry before the Executive Council of the UnitedNations.

 

49

----

Table of Contents

 

CEMIG has two other CDM projects in progress, relatedto Small Hydro Plants (“PCHs”), as it follows: one is related to the CachoeirãoPCH — 27MW, whereas the other is related to the Dores de Guanhães PCH — 14MW,the Senhora do Porto PCH — 12MW, the Fortuna II PCH — 9MW; and the Jacaré PCH —9MW. CEMIG holds an equity interest of 49% in all of these projects.

 

The Project Concept Documents (“DCPs”) for the PCHprojects have already been completed and are currently in the validation phasebefore the Designated Operational Entities (“DOEs”).

 

**Operational Technologies**

 

We continue to invest in automated monitoring andcontrol equipment in connection with our strategy of increasing efficiency andfurther modernizing and automating our generation, distribution andtransmission systems.

 

*Load Dispatch Center*

 

CEMIG’s System Operation Center (*Centro de Operação do Sistema*), or COS,located at our head office in Belo Horizonte, is the nerve center of ouroperations. It coordinates the operations of our entire electricity and energysystem, in real time, providing operational integration of the generation andtransmission of our energy. It also provides the link with other generation,transmission and distribution companies. The supervision and control executedby the COS now extends to more than 44 extra high and high voltage substationsand approximately 27 major generating power plants.

 

Through its activities the COS permanently guaranteesthe security, continuity and quality of our supply of electricity. Theactivities of the COS are supported by up-to-date telecommunications,automation and information technology resources, and executed by highlyqualified personnel. The COS has a Quality Management System, with ISO9001:2000 certification.

 

*Regional Distribution OperationCenters*

 

Our distribution network is managed through sevenRegional Distribution Operation Centers**(*Centros de Operações Regionais de Distribuição*),or CODs. The CODs monitor and coordinate our distribution network operations inreal time. The CODs are responsible for the supervision and control of 360distribution substations, 275,593 miles of medium voltage distribution lines,10,343 miles of sub-transmission lines and 6.6 million consumers in ourconcession area, comprising 774 municipalities of Minas Gerais.

 

We provided an average of 12,200 services a day in2009. All of the CODs are certified according to ISO Quality Standard 9001:2000. There are various systems in use to automate and support the CODs’processes including: trouble call, field crew management, distributionsubstation supervision and control, restoration of power, emergency switching,network disconnection, and inspection. Technologies including a geographicinformation system and radio/satellite data communication help to reduceconsumer service restoration time and provide better consumer service. Theseare devices, installed along our distribution network, that sense and interruptfault currents, and automatically restore service after momentary outages,improving operational performance and reducing restoration time and costs.

 

*Geospatial Information &Technology*

 

We are intensively using geospatial and technicaldocument management technology to support and improve engineering processes.Geo-referenced information on the electrical network, satellite and aerialphotographs of the concession area, diagrams and technical document images arestored in geospatial databases and can be easily retrieved by computersconnected to our corporate network, helping technicians to plan, design,construct, operate and maintain the generation, transmission and distributionnetwork.

 

We are using mobile technology in service dispatch fordistribution network maintenance and medium and high-voltage network dataacquisition. In 2009, a new function was developed and implemented usingdigital maps to manage crews, services and network retrieval.

 

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

 

*Internal Telecommunications Network*

 

Our telecommunications network is one of the largestin Brazil. It includes high performance microwave links with more than 220communication stations, an optical system with 1,557 miles of optical fibersand a mobile communication system with 811 radios including 644 trunking andVHF radios and 167 UHF and VHF portable radios. A total of 420 mobile radioshave data interface

 

50

----

Table of Contents

 

to mobile terminals installed in vehicles for dispatchsystems (operation and maintenance), which also have 940 mobile terminalsconnected through satellites.

 

*Corporate Data Network*

 

Our corporate network integrates enterprise servers(20 Reduced Instruction Set Computer (“RISC” )machines for the ERP and the newcommercial systems), 9.622 Intel microcomputers, 270 servers and 1,400connectivity devices, serving  216 sitesin  137 cities of Minas Gerais. Thecentralized infrastructure uses modern servers and devices with service levelagreements for hardware maintenance and software support. The process ofreception of meter reading data, digital calculation of electricity bills, andissuance of electricity bills to consumers in CEMIG’s secondary network hasbeen ISO 9001:2000 certified since 2005. Our information security systems are constantly updated for accesscontrol, firewalls, antispam and antivirus, to protect all data andfunctionalities against unauthorized access. We use mobile solutions, such aswireless devices, PDAs and cellular phones for easy access to data and fieldoperations.

 

In 2009, the RISC environment improved its processingcapacity by 63% and 2,210 Intel microcomputers were replaced by newer models.

 

*IT Governance Program*

 

We started an IT governance program in 2005. It isbased on two main principles: (i) aligning IT strategy with the overallstrategy of the business; and (ii) helping the Company to manage the risksassociated with implementing new technologies.

 

Numerous actions have been taken in recent years. Themost important was the adoption of ITIL® best practices. The following ITIL®processes and functions were prioritized for implementation: IncidentManagement, Configuration Management, Change Management, Problem Management,Capacity Management, Service Level Management and Service Desk.

 

In 2009, the IT governance process was officially implementedby the creation of a specific department to plan and control IT resourcesand projects, including management of ITIL (Information TechnologyInfrastructure Library) processes and PMO (Project Management Office).

 

*Call Centers*

 

We have one call center, in Belo Horizonte. Clientscan use a toll-free number to get information on their accounts, and reportservice problems. The call center is integrated with the technologies availablein the CODs, allowing us to give clients up-to-date information on serviceissues. The call center has modern facilities, with a staff of over 1,200, andis able to receive about 75,000 calls per day. Clients can also contact us bye-mail, by fax or via our website. As an indication of the service qualityprovided, our call center has had ISO 9001 Quality Certification since 1999.

 

*Commercial Management System*

 

Cemig Distribution has consolidated its new CommercialManagement System (“SGC”), which went live on May 4, 2008, withinvestments of R$178 million. The system processes data from all of CEMIG’scustomers scattered throughout the state of Minas Gerais, who are supplied athigh, medium and low voltages. Based on the SAP platform comprised of the CCS(Customer Care & Service), CRM (Customer Relationship Management) and BW(Business Warehouse) SAP systems, the system has proved successful in replacingthe former Consumer Information System (“SICO”). CEMIG can now adapt moreeasily and rapidly to the constant changes in regulations and market demands.The company has greater access to key operations and management data, resultingin improved service and decision making.

 

In 2009, new software was developed to print bills onsite using portable printers connected to handheld devices via Bluetoothconnection. The billing process utilizes 1,108 handheld devices processingapproximately 400,000 meter readings per day. This solution will increase thebilling process speed and also reduce cost.

 

*Maintenance and Repair Systems*

 

The 10,277 miles of high voltage transmission lines inCemig Distribution’s network, operating at 34.5 kV to 161 kV, are supported byapproximately 53,495 structures, mainly made of metal. Cemig Generation andTransmission’s network has 3,085 miles of high voltage transmission lines,supported by approximately 11,676 structures. The majority of the serviceinterruptions to our distribution and transmission lines are due to lightning,fire, vandalism, wind, and corrosion. The entire high voltage transmission linesystems of Cemig Distribution and Cemig Generation and Transmission areinspected from the air once a year, using a helicopter

 

51

----

Table of Contents

 

equipped with a gimbal-gyro-stabilized camera,followed by simultaneous visual and thermographic (infra-red) inspections.Land-based inspections are also carried out at intervals of between one andthree years, depending on the characteristics and age of the transmission line,number of outages, type of structure, and the line’s importance to theelectricity system as a whole.

 

We use modern modular aluminum structures to minimizethe impact of emergencies involving fallen towers. Most of our maintenance workon transmission lines is done using live-line methods. Being the first companyin Brazil to use bare-hand, live-line techniques in the maintenance oftransmission lines and substations, we have accumulated, over the last 32years, significant experience in this area. We have trained our staff in thisarea and have special vehicles and other necessary tools to support live- anddead-line maintenance.

 

We also maintain spare transformers and mobilesubstations to promptly reestablish power to our customers in case ofemergencies involving failed substations. In December 2008, as a result ofa partnership with ABB, we developed the first mobile, green substation, in138/13.8 kV and 15 MVA, which is completely insulated with vegetable oil. Weare also a pioneer in the use of 138 kV power transformers that are completelyinsulated with vegetable oil.

 

Aiming to improve the quality of electricity supply toour customers, R$67 million will be invested in 2010 to renew high-voltageassets and to replace equipment in substations and distribution lines that havesuffered depreciation, which are at the end of their life-span and have a lowperformance rate in the electrical system.

 

*Information Security Management*

 

As part of our goal to improve information security atCEMIG and to address the requirements of the Sarbanes-Oxley Act, we developedthe following in 2009:

 

·                  the awareness program (InformationSecurity Update) involving almost 700 employees, which focuses on basicconcepts of information security, phishing threats and recommendations aboutsecurity behavior;

·                  publication of a periodic informationsecurity newsletter; and

·                  design of a new system and revision ofthe information classification process

 

**Management Tools**

 

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

 

In 2009 , we started using Business Intelligence toolsthrough the implementation of Business Object SAP platform. A total of 13dashboards for financial and accounting analysis were developed. An ITdepartment dedicated to manage SAP environment and solutions was created.

 

We also implemented applications for accountingconsolidation of CEMIG companies in compliance with Brazilian corporate law.

 

In order to comply with federal decrees related to electronicsignature bookkeeping, three systems were developed and implemented: electronicsignature for invoicing, fiscal bookkeeping and accounting bookkeeping.

 

*Risk Management*

 

With the assistance of a leading consulting firm, webegan establishment of a Corporate Risk Management System in 2003, which wasconsolidated during the period of 2004 through 2006, in connection with ourunbundling process. As holder of a concession in the Brazilian electricitysector, we operate in environments where factors such as corporaterestructurings, regulations issued by energy sector government agencies,technological development, globalization and changes in the consumer marketgenerate uncertainties and risks.

 

The implementation of a coherent risk vision andstrategy at the corporate level is a new management trend, encouraged not onlyby the requirements of the Sarbanes-Oxley Act and the methods recommended bythe Committee of Sponsoring Organizations,

 

52

----

Table of Contents

 

or COSO II, but also by the perception that riskmanagement is an essential part of a sustainable development philosophy thataims to create value for shareholders.

 

Our Corporate Risk Management System aims to achievethe following: compliance with 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, including theability to aggregate individual risks, the ability to compare risks indifferent business units and a tool to accurately evaluate the measuresintroduced to minimize risks; provide other areas of strategic management withinput concepts and procedures, and factors that strengthen the company’sorganizational control infrastructure.

 

CEMIG is working to achieve the major risk managementobjective of an open environment conducive to effective communications aboutrisks and risk management up, down and across the enterprise, so that a trulyholistic, integrated, proactive, forward-looking and process-oriented approachis taken to assess all key business risks and opportunities, not only those ofa financial nature. During 2009, the most important risk management actionswere: (i) the third update of CEMIG’s Corporate Risks Matrix wasinitiated, considering the review of its risks position, the risks controlenvironment and its mitigation plans in order to adapt to the regulatorychanges and economic and market context, and (ii) the improvement of theCorporate Risk Matrix from the shareholder’s perspective, allowing managementto understand what stakeholders see as strategic threats and to identify risksthat do not exist in the Corporate Risks Matrix.

 

CEMIG’s Electricity Risks Management Committee, orCGRE, created in 2003, continues to propose policies and procedures forapproval by the executive officers, according to corporate risk policy, tominimize risks in the contracting (purchase and sale) of energy. The members ofthe committee come from numerous areas of the Company, including generation,distribution, sales, legal and financial. The CGRE gives support to thedecisions of the executive officers in relation to the Company’s energycommercialization to Free Consumers and participation in the CCEE auctions.Based on risk analyses, the CGRE proposes the maximum volumes that could besold and the amounts purchased by distributors in the auctions.

 

CEMIG’s risk management also has the benefit of aFinancial Risk Management Committee, which was created (i) to monitor thefinancial risks related to volatility and trends of the inflation indices,exchange rates and interest rates that affect our financial transactions, andwhich could negatively affect the Company’s liquidity and profitability, and(ii) to implement guidelines for proactive operation in relation to theenvironment of financial risks when implementing action plans.

 

The next step we intend to take is to improve theCorporate Risk Management System, with the assistance of a consulting firm, bydeveloping new products and mathematical and statistical methods used tocalculate and monitor the Corporate Risks Matrix’s risk positions, therebyincreasing transparency and safety in strategic decisions.

 

**Properties, Plants and Equipments andIntangible Assets**

 

Our principal properties consist of the powergeneration plants and transmission and distribution facilities described inthis Item 4. Our net book value of total property, plant and equipment,including our investment in certain consortia that operate electricitygeneration projects, was R$14,114 million at December 31, 2009 (includingongoing construction projects). Generation facilities represented 39.9% of thisnet book value, transmission and distribution facilities represented 55.7% andother miscellaneous property and equipment, including telecommunicationfacilities and intangible assets, represented 4.4%. The average annualdepreciation rate applied to these facilities was 2.5% for hydroelectricgeneration facilities, 3.1% for transmission facilities, 4.7% for distributionfacilities, 12.7% for administration facilities, and 6.7% for telecommunicationfacilities. Apart from our distribution network, no single one of ourproperties produced more than 10% of our total revenues in 2009. Our facilitiesare generally adequate for our present needs and suitable for their intendedpurposes. We have rights of way for our distribution lines, which are ourassets and do not revert to the landowner upon expiration of our concessions.

 

53

----

Table of Contents

 

**The Brazilian Power Industry**

 

***General***

 

Traditionally, in the Brazilian electricity sector,generation, transmission and distribution activities were conducted by a smallnumber of companies that had always been owned of either the Federal Governmentor the State Government. In the past, several companies controlled by the statewere privatized, in an effort to increase efficiency and competition. Theprevious administration, ruled by Fernando Henrique Cardoso (1995—2002), statedits objective to privatize the state-controlled part of the electricity sector,but the present administration has stopped this process, and has implemented a“New Industry Model” for the Brazilian electricity sector as set forth in LawNo. 10,848, of March 15, 2004, or The New Industry Model Law.

 

***The New IndustryModel***

 

The main objectives****ofthe New Industry Model are to guarantee security of supply and reasonableness****of rates. To guarantee supply, The NewIndustry Model Law requires (a) that distributors contract their entireloads, and be responsible for making realistic projections of demandrequirements and (b) that the construction of new hydroelectric andthermal plants be determined in ways that best balance security of supply andreasonableness of rates. To achieve reasonable rates, The New Industry ModelLaw requires (a) all purchases of electricity by distributors occur byauction, based on the lowest-rate criterion; (b) contracting be throughthe ACR, or the Pool system; and (c) contracting of load be separated intotwo types of transactions which will always be by auction: (i) contractingof the electricity of the new plants, which targets expansion; and(ii) contracting of the electricity of the existing plants, which targetsthe existing electricity demand.

 

The New Industry Model created two environments forthe purchase and sale of electricity: (i) the ACR, or the Pool, whichcontemplates the purchase by distribution companies through public auctions ofall energy necessary to supply their consumers; and (ii) the ACL, whichencompasses purchase of electricity by non-regulated entities (such as FreeConsumers and energy traders). Distributors will be allowed to operate only inthe regulated environment, whereas generators may operate in both, maintainingtheir competitive characteristics.

 

Expansion requirements of the sector****are evaluated by the Federal Governmentthrough the Ministry of Mines and Energy, or MME. In order to better organizethe electric energy sector, two entities have been created: (i) the EnergyResearch Company, or EPE, a state-controlled company responsible for planningthe expansion of generation and transmission; and (ii) the Electric EnergyTrading Chamber (*Câmara de Comercializaçãode Energia Eléctrica*), or CCEE, a private company, which is thesuccessor of the Wholesale Energy Market (Mercado Atacadista de EnergiaElétrica) (“MAE”), responsible for the accounting and settlement of short-termenergy sales. The CCEE is also responsible, through delegation by ANEEL, fororganizing and conducting the Pool public power auctions, in which alldistributors purchase energy.

 

The New Industry Model eliminated self-dealing,forcing distributors to purchase electricity at the lowest available pricesrather then buying electricity from related parties. The New Industry Modelalso exempted contracts executed prior to the enactment of the law, in order toprovide regulatory stability to transactions carried out before it was enacted.

 

The electricity arising from (1) low capacitygeneration projects located near the consumption points (such as certainco-generation plants and the Small Hydroelectric Power Plants), (2) plantsqualified under the Proinfa program,(3) Itaipu and (4) purchase andsale agreements entered into before the New Industry Model Law, are not subjectto the public auctions for the supply of electricity at the Pool. Theelectricity generated by Itaipu, located on the border of Brazil and Paraguay,is traded by Eletrobras and the Federal Government, through ANEEL, anddetermines the volumes that shall be mandatorily purchased by each distributionconcessionaire. The rates at which the Itaipu generated electricity is tradedare denominated in U.S. dollars and established by ANEEL pursuant to a treatybetween Brazil and Paraguay. As a consequence, Itaipu rates rise or fallin accordance with the variation of the U.S. Dollar/real exchange rate. Changesin the price of Itaipu generated electricity are, however, subject to a costrecovery mechanism.

 

***Challenges to theConstitutionality of the New Industry Model Law***

 

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

 

54

----

Tableof Contents

 

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

 

Underthe New Industry Model Law, electricity purchase and sale transactions arecarried out in two different market segments: (1) the regulated market, orthe Pool, which contemplates the purchase by distribution companies throughpublic bids of all electricity necessary to supply their consumers and(2) the free market, which encompasses purchase of electricity bynon-regulated entities (such as the Free Consumers and energy traders).

 

***The Regulated Market (the ACR or the Pool)****—*In the regulated market, distribution companies purchaseelectricity for their captive consumers through public auction regulated by ANEELand conducted by CCEE.

 

Energy purchases will take place throughtwo types of bilateral contract: (i) Energy Agreements (*Contrato de Quantidade de Energia*) and(ii) Capacity Agreements (*Contratos deDisponibilidade de Energia*)*.*Underan Energy Agreement, a generator commits to supply a certain amount ofelectricity and assumes the risk that electricity supply could be adverselyaffected by hydrological conditions and low reservoir levels, among otherconditions, that could interrupt the supply of electricity, in which case thegenerator will be required to purchase the electricity elsewhere in order tocomply with its supply commitments. Under a Capacity Agreement, a generatorcommits to make a certain amount of capacity available to the ACR. In this case,the revenue of the generator is guaranteed and the distributor must assume thehydrological risk. However potential additional costs of the distributors arepassed on to consumers. Together, these agreements comprise the energy purchaseagreements in the ACR (*Contratos deComercialização de Energia no Ambiente Regulado*), or CCEAR.

 

Underthe 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 are required to contract 100% of their projected electricityneeds, unlike the 95% under the former regulatory framework.

 

The regulation under the New Industry Model Lawstipulates that distribution companies that contract less than 100% of theirtotal captive consumption may be subject to fines. There are mechanisms toreduce this possibility, such as the purchase of energy from other distributioncompanies whose energy purchases exceeded forecasted demand, or purchase energyin auctions during the year. Any remaining shortfall from 100% of total captiveconsumption can be bought at the spot market price and the concessionaire wouldbe subject to a penalty payment equivalent to the shortfall multiplied by thereference value rate established by ANEEL. If a company contracts more than103% of its captive consumption, it would be subject to price risk if it sellsthis energy in the spot market in the future. To reduce such price risk, acompany may reduce the purchase contracts in the “existing energy” auction byup to 4% each year, and reduce those contracts due to loss of consumers thatbecame free and are supplied by generators directly. Any surplus may benegotiated in the spot market.

 

Accordingto the New Industry Model Law, electricity distribution concessionaires will beentitled to pass on to their respective consumers, in costs related toelectricity purchased through public bids, limited to the equivalent of 103% oftheir verified annual load, as well as any taxes and industry charges relatedto the public bids.

 

***The Free Market (the “ACL”)****—*In the freemarket, electricity is traded between generation concessionaires, IPPs(Independent Power Producer), self-generators, energy traders, importers ofenergy and Free Consumers. The free market also includes existing bilateralcontracts between generators and distributors until they expire. Uponexpiration, such contracts must be executed under the New Industry Model Law.

 

A consumer that is eligible to choose itssupplier, known as “potentially free consumer,” and that has a contract with adistribution company for an undetermined duration, may only be able to purchaseelectricity from other suppliers in the year following the declaration of itsintention to terminate such contract, which is required to be sent to thedistributor at least 15 days before the day such distributor is required tostate its electricity needs for the next auction, except as otherwise providedin the contract.

 

Potentially free consumers are those whosedemand exceeds 3 MW at a voltage equal to or higher than 69kV or at any voltagelevel, so long as the supply began after July 1995. In addition, consumerswith contracted demand equal to or greater than 500kW may be serviced bysuppliers other than their local distribution company if they move to energyfrom alternative energy sources, such as wind, biomass or small hydroelectricplants.

 

Oncea consumer has opted for the free market, it may only return to the regulatedsystem once it has given the distributor of its region five years notice,provided that the distributor may reduce such term at its discretion, exceptfor special consumers, which may provide 180 days notice. This extended noticeperiod seeks to assure that, if necessary, the distributor can purchaseadditional energy to supply the re-entry of Free Consumers into the regulatedmarket. In addition, distributors may alsoreduce the amount of energy purchased according to the volume of energy thatthey will no longer distribute to free consumers. State-owned generators maysell electricity to Free Consumers, but as opposed to private generators, theyare obliged to do so through an auction process.

 

55

----

Table ofContents

 

In the past, high tension consumers whopurchase their electricity from distributors in the regulated market did it ata subsidized price. This subsidy, known as the “cross-subsidy,” was graduallyeliminated by ANEEL, and is now terminated. The potentially free consumers arerequired by law to enter into separate contracts for the connection and use ofthe transmission or distribution lines and for the purchase of power.

 

***Restricted Activities of Distributors***

 

Distributorsin the National Interconnected Power System**(*Sistema Interligado Nacional*), or SIN, or the BrazilianGrid, are not permitted to (1) develop activities related to thegeneration or transmission of electricity, (2) sell electricity to FreeConsumers, except for those in their concession area and under the sameconditions and rates maintained with respect to captive consumers in the ACR,(3) hold, directly or indirectly, any interest in any other company, except interest in entities incorporated for raising, investmentand management of funds necessary for the distributor or its controlled,controlling or under common control companies, corporation or partnership or(4) develop activities that are unrelated to their respective concessions,except for those permitted by law or in the relevant concession agreement.

 

***Elimination of Self-Dealing***

 

Sincethe purchase of electricity for captive consumers will be performed through theACR, the so-called self-dealing, when distributors were permitted to meet up to30% of their electricity needs through electricity that was acquired fromaffiliated companies, is no longer permitted, except in the context ofagreements that were duly approved by ANEEL before the enactment of the NewIndustry Model Law. Distributors may, however, make purchases from affiliatedcompanies if the distributor participates in the public bidding process throughthe ACR, and the generator that bids the lowest price is an affiliated party.

 

***Contracts Executed prior to the New Industry ModelLaw***

 

TheNew Industry Model Law provides that the contracts executed by electricitydistribution companies and approved by ANEEL before the enactment of the NewIndustry Model Law will not be amended to reflect any extension in their termsor modification in prices or volumes of electricity already contracted.

 

***Reduction of the Level ofContracted Electricity***

 

Decree No. 5,163/04, which regulatesthe trade of electricity under the New Industry Model Law, allows distributioncompanies to reduce their CCEARs: (1) to compensate for the exit ofPotentially Free Consumers from the regulated market, pursuant to a specificdeclaration delivered to MME, (2) by up to 4.0% per year of the initialcontracted amount due to market deviations from the estimated marketprojections, at the distribution companies’ discretion, beginning two yearsafter the initial electricity demand was declared and (3) in the event ofincreases in the amounts of electricity acquired pursuant to contracts enteredinto before March 17, 2004. This reduction can be made only with CCEARs ofexisting power plants.

 

The circumstances in which the reductionof the level of contracted electricity will occur will be duly set forth in theCCEARs, and may be exercised at the sole discretion of the distribution companyand in compliance with the provisions described above and ANEEL regulations.

 

Pursuant to ANEEL’s regulations, thereduction of the level of contracted energy under the CCEARs of existing energyshall be preceded by the so-called Mechanism of Compensation of Surplus andDeficits, or MCSD, by means of which distribution companies which havecontracted energy in excess of their demand may assign a portion of theirCCEARs to distribution companies which have contracted less energy than neededto meet their consumer’s demand.

 

***Limitation on Pass-Through***

 

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

 

·                  no pass-through of costs for electricity purchases that exceed 103% ofregulatory demand;

 

56

----

Table of Contents

 

·                  limited pass-through of costs for electricity purchases made in an “A-3”auction, if the volume of the acquired electricity exceeds 2.0% of the demandverified in “A-5” auctions;

 

·                  limited pass-through of electricity acquisition costs from newelectricity generation projects if the volume re-contracted through CCEARs ofexisting generation facilities is below a “Contracting Limit” defined by DecreeNo. 5,163;

 

·                  from 2007 to 2009, electricity purchases from existing facilities in the“A-1” auction is limited to 1.0% of distribution companies’ demand. If theacquired electricity in the “A-1” auction exceeds 1.0%, pass-through of costsof the exceeding portion to final consumers is limited to 70.0% of the averagevalue of such acquisition costs of electricity generated by existing generationfacilities. The MME will establish the maximum acquisition price forelectricity generated by existing projects;

 

·                  electricity purchases in “marketadjustment” auctions are limited to 1% of a distribution concessionaire’s totaldemand (except for the years 2008 and 2009, when it will be 5%) andpass-through of costs is limited to Annual Reference Value; and

 

·                  if distributors fail to comply with the obligation to fully contracttheir demand, the pass-through of the costs from energy acquired in theshort-term market will be the equivalent to the lower of the PLD or the AnnualReference Value.

 

***Rationing Under The New Industry Model Law***

 

TheNew Industry Model Law establishes that, in a situation where the FederalGovernment decrees a compulsory reduction in the consumption of electricity ina certain region, all energy amount agreements in the regulated market, registeredwithin the CCEE in which the buyer is located, shall have their volumesadjusted in the same proportion to the consumption reduction.

 

***Rates***

 

Electricenergy rates in Brazil are set by ANEEL, which has the authority to readjustand review rates in accordance with the provisions under the relevantconcession contracts. Each distribution company’s concession contract providesfor an annual rate adjustment (*reajuste anual*)*.*In general, Parcel A costs are fully passed through toconsumers. Parcel A costs are the portion of the regular rate calculationformula, which provides for the recovery of certain costs that are not withinthe control of the distribution company. Parcel B costs, which are costs thatare under the control of the distributors, are restated for inflation inaccordance with the General Market Price Index (*Indice Geralde Preços do Mercado*), or IGP-M index. The average annual rateadjustment includes components such as the inter-year variation of Parcel Acosts (CVA) and other financial adjustments, which compensate for changes inthe company’s costs that were not previously taken into account in the rate wecharged the year before. Since this inter-year variation is to reimbursechanges in costs that took place in the previous year, it should not be part ofnext year’s annual adjustment.

 

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

 

Formore detailed information, see “Item 5. Operating and Financial Review andProspects—Rates for the Use of the Distribution and Transmission Systems.”

 

ANEELhas also issued regulations that govern the access to the distribution andtransmission facilities and establish the rate for use of the localdistribution grid, or Distribution Usage Rates, or TUSD, and the rate for theuse of the transmission grid, or Transmission Usage Rates, or TUST. The ratesto be paid by distribution companies, generators and Free Consumers for use ofthe interconnected power system are reviewed annually. The review of the TUSTtakes into account the revenues that are permitted of transmissionconcessionaires pursuant to their concession contracts. For more detailedinformation regarding the rate-setting structure in Brazil, see “—The BrazilianPower Industry—Rates for the Use of the Distribution and Transmission Systems.”

 

***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 inBrazil typically have to negotiate with the individual landowners to obtainneeded land. However, in the event that a concessionaire is unable to obtainneeded land in this way, such land may be condemned for the concessionaire’suse through specific legislation. In cases of governmental condemnation, theconcessionaires may have to participate

 

57

----

Table of Contents

 

innegotiations relating to the amount of compensation with landowners and theresettlement of communities to other locations. We make all efforts tonegotiate with the communities before applying to the judiciary.

 

***The Brazilian Electricity System Overview***

 

Brazil’spower production and transmission is a large-scale hydroelectric and thermalsystem made up predominantly of hydroelectric power stations, with multipleowners. The Brazilian Grid is comprised of companies in the southern,southeastern, west-central, and northeastern regions and part of the northernregion of Brazil. Only 3.4% of the country’s electricity production capacity isnot connected to the Brazilian Grid, in small isolated systems located mainlyin the Amazon region. Brazil’s abundant hydrological resources are managedthrough storage reservoirs. It is estimated that Brazil has a hydroelectricpower generation potential close to 243,352 MW, of which only 35% has beendeveloped or is under construction, according to Eletrobras.

 

Brazilhas an installed capacity in the interconnected power system of 97.74 GW,approximately 80% of which is hydroelectric. This installed capacity includeshalf of the installed capacity of Itaipu—a total of 14,000 MW owned equally byBrazil and Paraguay. There are approximately 55,000 miles of transmission lineswith voltages equal to or higher than 230 kV in Brazil.

 

Approximately38% of Brazil’s installed generating capacity and 56% of Brazil’s high voltagetransmission lines are operated by Eletrobras, a company owned by the Federal Government.Eletrobras has historically been responsible for implementing electric policy,conservation and environmental management programs. The remaining high voltagetransmission lines are owned by state-controlled or local electric powercompanies. Distribution is conducted by approximately 60 state or localutilities, a majority of which have been privatized by the Federal Governmentor state governments.

 

***Historical Background***

 

TheBrazilian Constitution provides that the development, use and sale of energymay be undertaken directly by the Federal Government or indirectly through thegranting of concessions, permissions or authorizations. Historically, theBrazilian power industry has been dominated by generation, transmission anddistribution concessionaires controlled by the Federal and state governments.Since 1995, the Federal Government has taken a number of measures torestructure the power industry. In general, these measures were aimed atincreasing the role of private investment and eliminating foreign investmentrestrictions, thus increasing overall competition in the power industry.

 

Inparticular, the Federal Government has taken the following measures:

 

·                                          The Brazilian Constitution was amended in 1995 to authorize foreigninvestment in power generation. Prior to this amendment, all generationconcessions were held either by a Brazilian individual or an entity controlledby Brazilian individuals or by the Federal or state governments.

 

·                                          The Federal Government enacted Law in 1995 that:

 

·                                          required that allconcessions for the provision of energy-related services be granted throughpublic bidding processes;

 

·                                          gradually allowed certainelectricity consumers with significant demand (generally greater than 3 MW),referred to as Free Consumers, to purchase electricity directly from suppliersholding a concession, 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 all or part oftheir electricity to Free Consumers, distribution concessionaires and tradingagents, among others;

 

·                                          granted Free Consumers andelectricity suppliers open access to all distribution and transmission systems;and

 

·                                          eliminated the need for aconcession to construct and operate power projects with capacity from 1 MW to30 MW, or “Small Hydroelectric Power Plants.”

 

·                                          Beginning in 1995, a portion of the controlling interests held byEletrobras and various states in generation and distribution companies weresold to private investors. At the same time, certain state governments alsosold their

 

58

----

Table of Contents

 

stakes in major distribution companies. While themajority of the distribution companies have been privatized, most generationcapacity is still controlled by Eletrobras, by means of its subsidiaries Chesf,Eletronorte and Furnas.

 

·                                          In 1998, the Federal Government enacted Law No. 9,648, or the PowerIndustry Law, to overhaul the basic structure of the electricity industry. ThePower Industry Law provided for the following:

 

·                                          the establishment of aself-regulated body responsible for the operation of the short-term electricitymarket, or the Wholesale Energy Market, which replaced the prior system ofregulated generation prices and supply contracts;

 

·                                          a requirement thatdistribution 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 Initial Contracts was to ensure distributioncompanies have access to a stable electricity supply at prices that guarantee afixed rate of return for the electricity generation companies during thetransition period leading to the establishment of a free and competitiveelectricity market;

 

·                                          the creation of the NationalIntegrated System Operator (*Operador Nacional doSistema*, or ONS), a non-profit, private entity responsible for theoperational management of the generation and transmission activities of theinterconnected power system; and

 

·                                          the establishment of publicbidding processes for concessions for the construction and operation of powerplants and transmission facilities, in addition to the bidding processrequirements under the Concessions Law and the Law No 9.074 enacted on July 7,1995.

 

·                                          On March 15, 2004, the Federal Government enacted LawNo. 10,848, or the New Industry Model Law, in an effort to furtherrestructure the power industry with the ultimate goal of providing consumerswith secure electricity supplies combined with low rates. On July 30, 2004the Federal Government published Decree 5,163, governing the purchase and saleof electricity under the New Industry Model Law, as well as the granting ofauthorizations and concessions for electricity generation projects. Theseinclude rules relating to auction procedures, the form of power purchaseagreements and the method of passing costs through to final consumers.

 

***Rationing and Extraordinary Rate Increases***

 

Belowaverage rainfall in the years preceding 2001 resulted in low reservoir levelsand low hydroelectric capacity in the Southeast, Central West and Northeastregions. A program, know as the Electricity Rationing Program, that lasted fromJune 2001 until February 2002, was designed by**ElectricityCrisis Management Chamber**(*Câmara de Gestão da Crise de Energia Elétrica*),or GCE, tosolve this problem and establish normal levels for reservoirs. As a result ofthe end of the rationing measures, the Federal Government terminated the GCEand created the Electricity Sector Management Committee (*Câmara deGestão do Setor Elétrico*), or CGSE, as coordinator of theelectricity sector revitalization measures. The General Agreement of theElectricity Sector was created to provide for compensation forrationing-related losses to generation and distribution companies in Brazil andrestore the economic equilibrium of the concession agreements. An extraordinaryrate increase, or RTE, applicable to final consumers would compensate bothgenerators and distributors for such rationing-related losses. The RTE alsocovers financial losses from January 2001 to October 2001, resultingfrom those costs that are beyond the control of the distributor, referred to asParcel A costs, as well as losses of generators incurred as a result of paymentof free energy costs above the Initial Contract average price.

 

TheNational Bank of Economic and Social Development (*BancoNacional de Desenvolvimento Econômico e Social*, or BNDES), created aspecial program to finance 90% of the amounts recoverable by means of the RTE.The loans are repayable over the rate increase collection period.

 

InApril 2003, the Federal Government, fearing that rate increases maycontribute to overall inflation in Brazil, decided to delay a rate increase towhich distribution companies were entitled under ANEEL resolutions to recoverintra-annual variation of Parcel A costs. On November 11, 2003, theFederal Government implemented an emergency program designed to compensatedistribution companies for the losses incurred due to the non-consideration ofthe intra-annual variation of Parcel A costs on occasion of the annual ratereadjustments that took place from April 2003 to April 2004. Suchprogram guaranteed to the applicable companies a loan from BNDES under specialconditions.

 

59

----

Table ofContents

 

***Concessions***

 

Thecompanies or consortia that wish to build or operate facilities for generation,transmission or distribution of electricity in Brazil must apply to the MME orto ANEEL, by delegation of MME, as granting authority, for a concession,permission or authorization, as the case may be. Concessions grant rights togenerate, transmit or distribute electricity in the relevant concession areafor a specified period. This period is usually 35 years for new generationconcessions, and 30 years for new transmission or distribution concessions. Forthe renewal of existing concessions, the period is usually 20 years fordistribution, 20-30 years for transmission, depending on the contract, and theperiod for generation depends on the contracts. An existing concession may berenewed at the granting authority’s discretion.

 

TheConcession Law establishes, among other things, the conditions that theconcessionaire must comply with in rendering electricity services, the consumer’srights and the obligations of the concessionaire and the granting authority.Furthermore, the concessionaire must comply with regulations in force governingthe electricity sector. The main provisions of the Concession Law aresummarized as follows:

 

*Adequate Service —*The concessionaire must render an adequate service to satisfy, amongother things, regularity, continuity, efficiency, safety and accessibility ofthe service.

 

*Use of Land —*The concessionaire may use public land or request the granting authorityto declare the public interest of private real estate, so as to benefit theconcessionaire. In such case the concessionaire shall compensate the affectedowners.

 

*Strict Liability —*The concessionaire is strictly liable for all damages arising from theperformance of its services and caused to consumers, to third parties or to thegranting authority.

 

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

 

*Intervention by the GrantingAuthority —*The granting authoritymay intervene in the concession, by means of a presidential decree, to ensurethe concessionaire’s adequate performance of services, as well as the fullcompliance with applicable contractual, regulatory and legal provisions in case the concessionaire fails to doso. Within 30 days after the decree date, the granting authority’s representativeis required to commence an administrative proceeding in which theconcessionaire is entitled to due process of law. During the term of theadministrative proceeding, a person appointed by the granting authority’sdecree becomes responsible for carrying on the concession. If theadministrative proceeding is not completed within 180 days after the decreedate, the intervention ceases and the concession is returned to theconcessionaire. The concession is also returned to the concessionaire if thegranting authority’s representative decides not to terminate the concession andthe concession term has not yet expired.

 

*Termination of the Concession —*The concession termination agreement may be terminated throughexpropriation and/or forfeiture. Expropriation is the early termination of aconcession for reasons related to the public interest that must be expressly declared by law and based on public interest grounds.Following the expropriation, the concessionaire is entitled to receive anindemnification, which may or may not adequately compensate investments made bythe concessionaire in expropriated assets that have not been fully amortized ordepreciated by the time of the expropriation. Forfeiture must be declared bythe granting authority after ANEEL, or MME, has made a final administrativeruling that the concessionaire has failed to adequately perform its obligationsunder the concession agreement. The concessionaire is entitled to due process of law in theadministrative proceeding declaring the forfeiture of the concession and canresort to the courts. The concessionaire isentitled to receive an indemnification for the investments made by theconcessionaire in expropriated assets that have not been fully amortized ordepreciated, after deduction of any amounts corresponding to outstanding finesand damages due by the concessionaire.

 

*Expiration —*When the concession expires, all assets, rights and privileges that arematerially related to the rendering of the electricity services revert to the Braziliangovernment. Following the expiration, the concessionaire is entitled to receive anindemnification for the investments made by the concessionaire in expropriated assets that have not been fully amortized or depreciated by the time ofthe expiration, net of special obligation.

 

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

 

60

----

Table ofContents

 

·                                          Execution of contracts with related parties in the cases provided byregulation;

 

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

 

·                                          Changes in controlling interest of the holder of the authorization orconcession.

 

***Principal Regulatory Authorities***

 

*National Energy Policy Council—CNPE*

 

InAugust 1997, the National Energy Policy Council (*ConselhoNacional de Política Energética*), or CNPE, was created to advise theBrazilian president regarding the development and creation of the nationalenergy policy. The CNPE is presided over by the MME, and the majority of itsmembers are officials of the Federal Government. The CNPE was created tooptimize the use of Brazil’s energy resources and to assure the supply ofelectricity to the country.

 

*Ministry of Mines and Energy—MME*

 

TheMME is the Federal Government’s primary regulator of the power industry.Following the adoption of the New Industry Model Law, the Federal Government,acting primarily through the MME, undertook certain duties that were previouslyunder the responsibility of ANEEL, including the drafting of guidelinesgoverning the granting of concessions and the issuance of directives governingthe bidding process for concessions relating to public services and publicassets.

 

*National Electric Energy Agency—ANEEL*

 

TheBrazilian power industry is regulated by ANEEL, an independent federalregulatory agency. After enactment of the New Industry Model Law, ANEEL’sprimary responsibility is to regulate and supervise the power industry in linewith the policy to be dictated by MME and to respond to matters which aredelegated to it by the Federal Government and or MME. ANEEL’s currentresponsibilities include, among others:

 

·                                          administering concessions for electricity generation, transmission anddistribution activities, including the approval of electricity rates;

 

·                                          enacting regulations for the electricity industry;

 

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

 

·                                          promoting the public bidding process for new concessions;

 

·                                          settling administrative disputes among electricity generation entitiesand electricity purchasers; and

 

·                                          defining the criteria and methodology for the determination oftransmission rates.

 

*National System Operator—ONS*

 

TheONS was created in 1998 as a non-profit private entity comprised of FreeConsumers and energy utilities engaged in the generation, transmission anddistribution of electricity, in addition to other private participants such asimporters and exporters. The New Industry Model Law, granted the FederalGovernment the power to appoint three directors of the ONS, including theDirector-general. The primary role of the ONS is to coordinate and control thegeneration and transmission operations in the interconnected power system,subject to ANEEL’s regulation and supervision. The objectives and principalresponsibilities of the ONS include, among others:

 

·                                          planning and scheduling of the operation and the centralized dispatchingof the generation in order to optimize the interconnected power system;

 

·                                          supervision and coordination of the electric system operation centers;

 

61

----

Table ofContents

 

·                                          supervision and control of the nationalinterconnected power system and the international interconnections;

 

·                                          retaining and managing of the electric energy transmission services andrespective access conditions, as well as the ancillary services;

 

·                                          proposing to ANEEL the expansion and reinforcement of the basictransmission grid; and

 

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

 

*Electric Energy Trading Chamber—CCEE*

 

TheCCEE replaced the Wholesale Energy Market pursuant to the new rules setforth under the New Industry Model Law. One of the main roles of the CCEE is toconduct public auctions in the regulated market, including the auction ofexisting electricity and new electricity. Additionally, the CCEE isresponsible, among other things, for (1) registering the volume of all theenergy purchase agreements within the regulated market (*Contratos de Comercialização de Energia no AmbienteRegulado*), or CCEAR, and the agreements resulting from the freemarket, and (2) the accounting for and clearing of short-termtransactions.

 

Underthe New Industry Model Law, the price of electricity bought or sold in the spotmarket, known as the Price of Liquidation of Differences (*Preço de Liquidação de Diferenças*), orPLD, takes into account factors similar to the ones used to determine theWholesale Energy Market spot prices prior to the New Industry Model Law. Amongthese factors, the variation of the PLD will be mainly linked to theequilibrium between the market supply and demand for electricity as well as theimpact that any variation on this equilibrium may have on the optimal use ofthe electricity generation resources by the ONS.

 

TheCCEE is comprised of power generation, distribution, trading agents and freeconsumers, and its board of directors is comprised of four members appointed bythese agents and one by the MME, who is the chairman of the board of directors.

 

*Energy Research Company—EPE*

 

OnAugust 16, 2004, the Federal Government enacted the decree that createdthe Electricity Research Company, or EPE,**astate-owned company, which is responsible for conducting strategic research onthe energy industry, including, among others, electric energy, oil, gas, coaland renewable energy sources. EPE is responsible for (i) studyingprojections of the Brazilian energy matrix, (ii) preparing and publishingthe national energy balance, (iii) identifying and quantifying energy resourcesand (iv) obtaining the required environmental licenses for new generationconcessionaires. The research carried out by EPE will be used to subsidize MMEin its policymaking role in the domestic energy industry. EPE is alsoresponsible for approving the technical qualification of new electric energyprojects to be included in the related auctions.

 

*The Electricity Sector MonitoringCommittee—CMSE*

 

Decree5,175, of August 9, 2004, established the Electricity Sector MonitoringCommittee, or CMSE, which acts under the direction of the MME. The CMSE isresponsible for monitoring and permanently evaluating the continuity andsecurity of the electricity supply conditions and for indicating necessarysteps to correct identified problems.

 

***Ownership Limitations***

 

In2000, through Resolution No. 278, ANEEL established limits, no longer inforce, on the concentration of certain services and activities within the powerindustry. Under these limits, with the exception of companies participating inthe National Privatization Program (which need only comply with such limitsonce their final corporate restructuring is accomplished) no power company(including both its controlling and controlled companies) may (1) own morethan 20% of Brazil’s installed capacity, 25% of the installed capacity of theSouth/Southeast/Central-West region or 35% of the installed capacity 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.

 

OnNovember 10, 2009, ANEEL issued Resolution No. 378, which establishedthat ANEEL, upon identifying an act that may cause unfair competition or mayresult in relevant market control, must notify the Secretariat of Economic Law(Secretaria de

 

62

----

Table of Contents

 

DireitoEconômico) (“SDE”) of the Ministry of Justice, pursuant to art. 54 of Law No. 8,884of June 11, 1994. After the notification, the SDE must inform theantitrust authority Conselho Administrativo de Defesa Econômica (“CADE”). Ifnecessary, the SDE will require ANEEL to analyze the aforementioned acts. CADEwill decide if there should be any punishment regarding those acts, which mayvary from pecuniary penalties to the split of the company, pursuant to articles23 and 24 of the abovementioned law.

 

***Incentives for Alternatives Sources of Power***

 

In2000, a Federal decree created the Thermoelectric Priority Program (*Programa Prioritário de Termeletricidade*), or PPT, forpurposes of diversifying the Brazilian energy matrix and decreasing its strongdependency on hydroelectric plants. The benefits granted to thermoelectricplants under the PPT include (1) guaranteed gas supply for 20 years,(2) assurance of the application of the normative value by distributioncompanies who purchase their electricity for 20 years, according to regulationfrom ANEEL, thereby assuring that costs related to the acquisition of theelectricity produced by thermoelectric plants will be transferred to rates and(3) guaranteed access to a BNDES special financing program for the powerindustry.

 

In2002, the Proinfa Program was established by the Federal Government to createcertain incentives for the development of alternative sources of energy, suchas wind energy projects, Small Hydroelectric Power Plants and biomass projects.Under the Proinfa Program, Eletrobras will purchase the electricity generatedby these alternative sources for a period of 20 years and will pass it on to distributors. In its initial phase, theProinfa Program is limited to a total contracted capacity of 3,300 MW.

 

Law9,427/96, as amended by Law 10,762/03, further established that hydroelectricplants with an installed capacity of 1MW or less, generation plants classifiedas small hydroelectric plants, and those with qualifying solar, wind, biomassor cogeneration sources, with an injected capacity of 30MW or less,  used for independent production orself-production, will have the right to a discount of at least 50% on the ratesfor use of the transmission and distribution systems, charged on production andconsumption of the energy sold. This legal provision was regulated by ANEELthrough its Resolutions 077/2004,****247/2006and 271/2007.

 

***Regulatory Charges***

 

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

 

Incertain circumstances, power companies are compensated for assets used inconnection with a concession if this concession is eventually revoked or is notrenewed. In 1971, the Brazilian Congress created a Global Reversion Fund (*Reserva Global de Reversão*), or RGR, designed to providefunds 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 at anannual rate equal to 2.5% of the company’s fixed assets in service, but not toexceed 3.0% of total operating revenues in any year. In recent years, the RGRhas been used principally to finance generation and distribution projects. TheRGR is scheduled to be phased out by 2010, and ANEEL is required to revise therate so that the consumer will receive some benefit from the termination of theRGR.

 

TheFederal Government has imposed a fee on IPPs reliant on hydrological resources,except for Small Hydroelectric Power Plants and generators under the publicservices regime, similar to the fee levied on public-industry companies inconnection with the RGR. IPPs are required to make contributions to the PublicUse Fund (*Fundo de Uso de Bem Público*), or UBP,according to the rules of the corresponding public bidding process for thegranting of concessions. Eletrobras received the UBP payments untilDecember 31, 2002. All payments to the UBP since December 31, 2002are paid directly to the Federal Government.

 

*FuelConsumption Account—CCC*

 

Distributioncompanies must contribute to the Fuel Consumption Account (*Conta deConsumo de Combustível*), or CCC. The CCC was created in 1973 togenerate financial reserves to cover elevated costs associated to the increaseduse of thermoelectric energy plants, in the event of a rainfall shortage, giventhe higher marginal operating costs of thermoelectric energy plants compared tohydroelectric energy plants. Each energy company is required to contributeannually to the CCC. The annual contributions are calculated on the basis ofestimates of the cost of fuel needed by the thermoelectric energy plants in thefollowing year. The CCC, in turn, reimburses energy companies for a substantialportion of the fuel costs of their thermoelectric energy plants. The CCC isadministered by Eletrobras.

 

InFebruary 1998, the Federal Government provided for the phasing out of theCCC. Subsidies from the CCC were phased out over a three-year period beginningin 2003 for thermoelectric energy plants constructed prior toFebruary 1998 and currently belonging to the Brazilian Grid.Thermoelectric energy plants constructed after that date will not be entitledto subsidies from the CCC. In April 2002, the Federal Governmentestablished that subsidies from the CCC would continue to be paid to thosethermoelectric plants located in isolated systems for a period of 20 years inorder to promote generation of electricity in these regions.

 

63

----

Table ofContents

 

*Chargefor the Use of Water Resources*

 

Withthe exception of Small Hydroelectric Power Plants, all hydroelectric utilitiesin Brazil must pay fees to Brazilian states and municipalities for the use ofhydrological resources. Such amounts are based on the amount of electricitygenerated by each utility and are paid to the states and municipalities wherethe plant or the plant’s reservoir is located.

 

*EnergyDevelopment Account— CDE*

 

In2002, the Federal Government instituted the Energy Development Account (*Conta de Desenvolvimento Energético*), or CDE, which isfunded through annual payments made by concessionaires for the use of publicassets, penalties and fines imposed by ANEEL and, since 2003, the annual feesto be paid by agents offering electricity to final consumers, by means of acharge to be added to the rates for the use of the transmission anddistribution systems. These fees are adjusted annually. The CDE was created to supportthe (1) development of electricity production throughout the country,(2) production of electricity by alternative energy sources and(3) universalization of energy services throughout Brazil. The CDE shallbe in effect for 25 years and shall be managed by Eletrobras.

 

TheNew Industry Model Law establishes that the failure to pay the contribution toRGR, Proinfa Program, the CDE, the CCC, or payments due by virtue of purchaseof electricity in the regulated market will prevent the non-paying party fromreceiving a rate readjustment (except for an extraordinary revision) orreceiving resources arising from the RGR, CDE or CCC.

 

*ANEELInspection Charge*

 

EnergyServices Inspection Charge, or TFSEE, is an annual tax charged by ANEEL for itsadministrative and operational costs. The tax is calculated based on the typeof service provided (including independent production), and is proportional tothe size of the concession, permission or authorization. The TFSEE is limitedto 0.5% of the annual economic benefit, considering the installedcapacity,  earned by the concessionaire,permit holder or authorized party and must be paid directly to ANEEL in 12monthly installments.

 

***Energy Reallocation Mechanism***

 

TheEnergy Reallocation Mechanism (Mecanismo de Realocação de Energia), or MRE,attempts to mitigate the risks involved in the generation of hydrologicalelectricity by mandating that all hydrogenerators share the hydrological riskswithin the Brazilian Grid. According to Brazilian law, the revenue arising fromthe sale of energy by generators does not depend on the energy effectivelygenerated by them, but rather on the Assured Energy (the “Effective Power,” areference amount of electricity established by the MME in accordance withstudies conducted by EPE, that considers the probability of long term averagehydrology) of each plant, which is determined by the government in eachconcession agreement.

 

Anyimbalances between the power energy actually generated and the Assured Energyis covered by the MRE. In other words, the MRE reallocated the energy,transferring surplus from those who generated in excess of their Assured Energyto those who generated less than their Assured Energy. The volume ofelectricity actually generated by the plant, either more or less than theAssured Energy, is priced pursuant to a “Energy Optimization Tariff” whichcovers the operation and maintenance costs of the plant. This revenue oradditional expense will be accounted for on a monthly basis by each generator.

 

Althoughthe MRE is efficient to mitigate the risks of individual plants that haveadverse hydrological conditions in a river basin, it does not succeed inmitigating this risk when low hydro levels affect the Sistema InterligadoNacional (SIN) or National Interconnected System (“System”) as a whole or largeregions of it. In extreme situations, even with the MRE, generation of theentire System won’t attain the level of the Assured Energy and hydro generatorsmay be exposed to the spot market. In these situations, the shortage in hydroresources is going to be compensated by greater use of thermal generation andspot prices will be higher

 

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

 

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

 

64

----

Table of Contents

 

*TUSD*

 

TheTUSD is paid by generation companies and customers for the use of thedistribution system of the distribution concessionaire to which they areconnected. It is readjusted annually according to an inflation index and thevariation of costs for the transmission of energy and regulatory charges. Theamount to be paid by the user connected to the distribution system iscalculated by multiplying the amount of electricity contracted with thedistribution concessionaire for each connection point, in kW, by the rate inR$/kW which is set by ANEEL.

 

*TUST*

 

TheTUST is paid by generation companies and Free Consumers for the use of thebasic transmission grid to which they are connected. Its is readjusted annuallyaccording to an inflation index and the annual revenue of the transmissioncompanies adjustment. According to criteria established by ANEEL, owners of thedifferent parts of the transmission grid were required to transfer thecoordination of their facilities to the ONS in return for receiving regulatedpayments from the transmission system users. Network users, includinggeneration companies, distribution companies and Free Consumers, have signedcontracts with the ONS entitling them to use the transmission grid in returnfor the payment of TUST. Other parts of the grid that are owned by transmissioncompanies but which are not considered part of the transmission grid are madeavailable directly to the interested users who pay a specified fee.

 

*Distribution*

 

Distributionrates are subject to review by ANEEL, which has the authority to adjust andreview rates in response to changes in electricity purchase costs and marketconditions. When adjusting distribution rates, ANEEL divides the costs ofdistribution companies between (1) costs that are beyond the control ofthe distributor, or Parcel A costs, and (2) costs that are under thecontrol of the distributor, or Parcel B costs. The rate adjustment is based ona formula that takes into account the division of costs between the twocategories.

 

ParcelA costs include, among others, the following:

 

·                                          Regulatory Charges (RGR, CCC, CDE, TFSEE and Proinfa);

 

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

 

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

 

Thepass-through of electricity purchase costs under supply agreements negotiatedbefore the enactment of the New Industry Model Law is subject to a ceilingbased on a normative value established by ANEEL for each different source ofenergy (such as hydroelectric, thermoelectric and alternative sources ofenergy). The normative value applied to the supply contracts is adjustedannually in order to reflect increases in costs incurred by generators. Suchadjustment takes into account (1) inflation, (2) costs incurred inhard currency and (3) fuel related costs (such as supply of natural gas).Costs incurred in IGP-M shall correspond to at least 25% of all costs incurredby generators.

 

ParcelB costs are those that are within our control and include, among others:

 

·                                          return on investment related to the concession area and its expansion;

 

·                                          taxes on revenue;

 

·                                          depreciation costs; and

 

·                                          operation and maintenance costs of the distribution system.

 

OnMarch 29, 2010, CEMIG announced, through the release of a Relevant FactNotice, the execution,  jointly with itssubsidiary Cemig Distribution, of the third amendment to concession agreements No. 002/1997,003/1997, 004/1997 and 005/1997 which changed how the annual rate adjustment iscalculated in order to promote the neutralization of Parcel A.

 

Eachdistribution company’s concession agreement provides for an annual rateadjustment (*reajuste*)*.*Ingeneral, Parcel A costs are fully passed through to consumers. Parcel B costs,however, are restated for inflation in accordance with General Market

 

65

----

Table of Contents

 

PriceIndex (Indice Geral de Preços do Mercado), or IGP-M index, adjusted by an XFactor. Electricity distribution companies, according to their concessioncontracts, are also entitled to periodic revisions (*revisãoperiódica*)*.*Theserevisions are aimed at (1) assuring necessary revenues to cover efficientParcel B operational costs and adequate compensation for investments deemedessential for the services within the scope of each company’s concession and(2) determining the X factor, which is based on two components(i) Xa, which is a factor based on the difference between the IPCA andIGP-M inflation indexes multiplied by our total personnel costs (since ourlabor increases are based on the IPCA and our tariff increases are based on theIGP-M) and is set each year; and (ii) Xe, which is a factor based on ourproductivity gains over a five-year period and is set every five years.

 

TheX factor is used to adjust the proportion of the change in the IGP-M index thatis used in the annual adjustments. Accordingly, upon the completion of eachperiodic revision, application of the X factor requires distribution companiesto share their productivity gains with final consumers.

 

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

 

**Item 4A.****                ****UnresolvedStaff Comments**

 

NotApplicable.

 

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

 

*You should read the information contained in this section together withour financial statements contained elsewhere in this annual report. Thefollowing discussion is based on our financial statements, which have beenprepared in accordance with U.S. GAAP and presented in reais.*

 

**Critical Accounting Estimates**

 

Thepreparation of our consolidated financial statements in conformity with U.S.GAAP requires us to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, as well as the reportedamounts of revenues and expenses during the reporting periods. We evaluate ourestimates on an ongoing basis and base them on a combination of historicalexperiences and various other assumptions that we believe to be reasonableunder the circumstances. Actual results could differ materially from thoseestimates. Our critical accounting policies that affect our more significantjudgments used in the preparation of our consolidated financial statements areset forth below.

 

*Regulatory Assets and Liabilities*

 

Asa result of various actions taken by the Federal Government and ANEEL in 2001,the Company’s distribution business is subject to the provisions of theFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) Topic 980 — Regulated Operations (FASB Statement No.  71 -Accounting for the Effects of Certain Types of Regulation”). The rate-settingstructure in Brazil is designed to provide for recovery of the Company’sallowable 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.

 

During2001, the Federal Government instituted an electricity rationing plan inresponse to an energy shortage caused by low rainfall, reduced reservoir levelsand Brazil’s significant dependence on electricity generated from hydrologicalresources. The rationing resulted in losses for the Company and otherelectricity 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 “GeneralAgreement”) with the Federal Government that provided resolution torationing-related issues as well as to certain other electricity rate-relatedissues. The General Agreement provided for a rate increase intended toreimburse revenues lost as a result of the rationing program in 2001 and 2002.The increased rates were in force in the Company for a period of 74 months fromFebruary 2002. The amount was recovered in accordance with Emerging IssuesTask Force (“EITF”) No. 92-7 “Accounting by Rate Regulated

 

66

----

Table of Contents

 

Utilitiesfor the Effects of Certain Alternative Revenue Programs” (included in FASB ASCSubtopic 980-605 Regulated Operations — Revenue Recognition).

 

*Valuation of Long-Lived Assets*

 

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

 

*Accrual for Contingencies*

 

Weare party to certain legal proceedings in Brazil arising in the normal courseof business regarding tax, labor, civil and other issues.

 

Weaccount for contingencies in accordance with SFAS No. 5 “Accounting forContingencies.” This Statement was codified into Topic ASC 450 “Contingencies”.Such accruals are estimated based on historical experience, the nature of theclaims, as well as the current status of 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 to contingencies could change as newdevelopments occur or more information becomes available. The outcome of thecontingencies could vary significantly and could materially impact ourconsolidated results of operations, cash flows and financial position.Management has applied its best judgment in applying ASC Topic 450 to thesematters.

 

*Employee Post-Retirement Benefits*

 

Wesponsor a defined-benefit pension plan and defined-contribution pension plancovering substantially all of our employees. We have also established post-retirementhealth and dental care plans and pay life insurance premiums. We account forthese benefits in accordance with SFAS No. 87 “Employers’ Accounting forPensions” (included in ASC Topic 715 and SFAS No. 106) “Employers’Accounting for Post-retirement Benefits other than Pensions”  (included in ASC Topic 715).We have appliedSFAS 132R “Employers Disclosures about Pensions and Other Post-retirementBenefits” to disclose information about pension plans and other post-retirementbenefit plans and have also applied SFAS No. 158 “Employers Accounting forDefined Benefit Pension and Other Postretirement Plans” (included in ASC Topic715).

 

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

 

*Deferred Taxes*

 

Weaccount for income taxes in accordance with FASB ASC Topic 740 (SFASNo. 109 “Accounting for Income Taxes”), which requires an asset andliability approach to recording current and deferred taxes. Accordingly, theeffects of differences between the tax basis of assets and liabilities and theamounts recognized in our consolidated financial statements have been treatedas temporary differences for the purpose of recording deferred income tax.

 

Weregularly review our deferred tax assets for recoverability and establish avaluation allowance based on historical taxable income, projected futuretaxable income, and the expected timing of the reversals of existing temporarydifferences. If we are unable

 

67

----

Table of Contents

 

togenerate sufficient future taxable income, or if there is a material change inthe actual effective tax rates or time period within which the underlyingtemporary differences become taxable or deductible, we could be required toestablish a valuation allowance against all or a significant portion of ourdeferred tax assets resulting in a substantial increase in our effective taxrate and a material adverse impact on our operating results.

 

Weadopted FASB Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes (included in FASB ASC Topic 740, Income Taxes), on January 1,2007, that prescribes a recognition threshold and measurement attribute for thefinancial statement of a tax position taken or expected to be taken. ThisInterpretation resulted in increased relevance and comparability in financialreporting of income taxes because all tax positions accounted for in accordancewith ASC Topic 740, will be evaluated for recognition, derecognition, andmeasurement using consistent criteria. This adoption did not result in anymaterial adjustment in the financial statements of the Company.

 

*Depreciation*

 

Depreciationis computed using the straight-line method, at annual rates based on theestimated useful lives of the assets, in accordance with ANEEL regulations andindustry practice in Brazil. To the extent that the actual lives differ fromthese estimates, there would be an impact on the amount of depreciation accruedin our consolidated financial statements. A significant decrease in theestimated useful life of a material amount of property, plant and equipment, orin the assets of the electricity generation project consortium in which we area partner, could have a material adverse impact on our operating results in theperiod in which the estimate is revised and in subsequent periods.

 

*Allowance for Doubtful Accounts*

 

Werecord an allowance for doubtful accounts in an amount that we estimate to besufficient to cover presently foreseeable losses.

 

Wecontinuously monitor collections and payments from consumers and review andrefine our estimation process. A future change in our estimates could result inan increase in the allowance for doubtful accounts which could have a materialadverse impact on our operating results and financial condition.

 

68

----

Table of Contents

 

**RecentlyIssued U.S. GAAP Pronouncements**

 

· Transfers andServicing (ASC 860), Accounting for Transfers of Financial Assets (ASU 2009-16)

 

TheFASB issued Accounting Standards Update (“ASU”) No. 2009 16, Transfers andServicing (Topic 860): Accounting for Transfers of Financial Assets (FASBStatement No. 166, Accounting for Transfers of Financial Assets — anamendment of FASB Statement No. 140) in December 2009. ASU 2009 16removes the concept of a qualifying special purpose entity (QSPE) from ASCTopic 860, Transfers and Servicing, and the exception from applying ASC 810 10to QSPEs, thereby requiring transferors of financial assets to evaluate whetherto consolidate transferees that previously were considered QSPEs. Transferorimposed constraints on transferees whose sole purpose is to engage in securitizationor asset backed financing activities are evaluated in the same manner under theprovisions of the ASU as transferor imposed constraints on QSPEs that wereevaluated under the provisions of Topic 860 prior to the effective date of theASU when determining whether a transfer of financial assets qualifies for saleaccounting. The ASU also clarifies the Topic 860 sale accounting criteriapertaining to legal isolation and effective control and creates more stringentconditions for reporting a transfer of a portion of a financial asset as asale. The ASU is effective for periods beginning after December 15, 2009,and may not be early adopted. The Company expects that the adoption of ASU 200916 will not have a material impact on its consolidated financial statements.

 

· Consolidation(ASC 810), Improvements to Financial Reporting by Enterprises InvolvedWith Variable Interest Entities (ASU 2009-17)

 

TheFASB issued ASU 2009 17, Consolidations (Topic 810): Improvements to FinancialReporting by Enterprises Involved with Variable Interest Entities (FASBStatement No. 167, Amendments to FASB Interpretation No. 46(R)) in December 2009.ASU 2009 17, which amends the Variable Interest Entity (VIE) Subsections of ASCSubtopic 810 10, Consolidation — Overall, revises the test for determining theprimary beneficiary of a VIE from a primarily quantitative risks and rewardscalculation based on the VIE’s expected losses and expected residual returns toa primarily qualitative analysis based on identifying the party or relatedparty group (if any) with (a) the power to direct the activities that mostsignificantly impact the VIE’s economic performance and (b) the obligationto absorb losses of, or the right to receive benefits from, the VIE that couldpotentially be significant to the VIE. The ASU requires kick out rights andparticipating rights to be ignored in evaluating whether a variable interestholder meets the power criterion unless those rights are unilaterallyexercisable by a single party or related party group. The ASU also revises thecriteria for determining whether fees paid by an entity to a decision maker oranother service provider are a variable interest in the entity and revises theTopic 810 scope characteristic that identifies an entity as a VIE if theequity-at-risk investors as a group do not have the right to control the entitythrough their equity interests to address the impact of kick out rights andparticipating rights on the analysis. Finally, the ASU adds a new requirementto reconsider whether an entity is a VIE if the holders of the equityinvestment at risk as a group lose the power, through the rights of thoseinterests, to direct the activities that most significantly impact the VIE’seconomic performance, and requires a company to reassess on an ongoing basiswhether it is deemed to be the primary beneficiary of a VIE. ASU 2009 17 iseffective for periods beginning after December 15, 2009 and may not beearly adopted. The Company expects that the adoption of ASU 2009 17 will nothave a material impact on its consolidated financial statements.

 

· Codification

 

TheFASB issued ASU No. 2009-01 in June 2009. This Update, also issued asFASB Statement of Financial Accounting Standards (SFAS) No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles,” is effective for financial statements issued after September 15,2009. ASU No. 2009-01 requires that the FASB’s ASC become the sole sourceof authoritative U.S. generally accepted accounting principles recognized bythe FASB for nongovernmental entities. The Codification is meant to simplifyuser access to all authoritative GAAP by reorganizing GAAP pronouncements intoroughly 90 accounting topics within a consistent structure. All previous level(a)-(d) US GAAP standards issued by a standard setter is superseded. Level(a)-(d) US GAAP refers to the previous accounting hierarchy. All otheraccounting literature not included in the Codification is nonauthoritative.Following this Statement, the Board will not issue new standards in the form ofStatements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.Instead, it will issue ASUs. The Board will not consider ASUs as authoritativein their own right. ASUs will serve only to update the Codification. CEMIGadopted this ASU effective July 1, 2009.

 

· FASB StatementNo. 157, Fair Value Measurements (“SFAS 157”)

 

EffectiveJanuary 1, 2009, the Company implemented SFAS No. 157, “Fair ValueMeasurements” for nonfinancial assets and nonfinancial liabilities measured atfair value, except those that are recognized or disclosed on a recurring basis(at least annually). This Statement was codified into Topic ASC 820 “Fair ValueMeasurement and Disclosures”. There was no impact to the Company’s consolidatedfinancial statements from the implementation of this Topic for nonfinancialassets and liabilities, other than additional disclosures that have beenincorporated into Note 25 of these financial statements.

 

69

----

Table of Contents

 

*Analysis of Electricity Sales and Cost of Electricity Purchased*

 

Electricityrates in Brazil, related to electricity distribution companies sales to captivecustomers,  are set by ANEEL, which hasthe authority to readjust and review rates in accordance with the applicableprovisions of the concession contracts. See “Item 4. The Brazilian PowerIndustry—Rates.”

 

Wecharge captive consumers for their actual electricity consumption during each30-day billing period at specified rates. Certain large industrial consumersare charged according to the electricity capacity contractually made availableto them by us, with adjustments to those rates according to consumption duringpeak demand time as well as capacity requirements that exceed the contractedamount.

 

Ingeneral, rates on electricity that we purchase are determined by reference tothe capacity contracted for as well as the 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.

 

Thefollowing table sets forth the average rate (in *reais* per MWh) and volume (by GWh) components of electricitysales and purchases for the periods indicated. The term “average rate” refersto revenues for the relevant class of consumers divided by the MWh used by suchclass and does not necessarily reflect actual rates and usage by a specificclass of end-users during any particular period.

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Electricity Sales:**                   |       |                                       |       |   |   |   |   |
| Average rate to final consumers (R$/MWh) |       |                                       |       |   |   |   |   |
| Industrial rate                          |       | 160.90                                     |       | 145.09 |   | 132.99 |   |
| Residential rate                         |       | 516.34                                     |       | 473.06 |   | 517.98 |   |
| Commercial rate                          |       | 427.47                                     |       | 429.12 |   | 453.66 |   |
| Rural rate                               |       | 253.17                                     |       | 241.29 |   | 268.64 |   |
| Public services rate and others          |       | 305.23                                     |       | 301.42 |   | 313.73 |   |
|                                     |       |                                       |       |   |   |   |   |
| Total sales to final consumers (GWh)     |       |                                       |       |   |   |   |   |
| Industrial consumers                     |       | 22,113                                     |       | 26,198 |   | 24,183 |   |
| Residential consumers                    |       | 7,774                                      |       | 7,164 |   | 6,813 |   |
| Commercial consumers                     |       | 4,674                                      |       | 4,423 |   | 4,111 |   |
| Rural consumers                          |       | 2,208                                      |       | 2,296 |   | 2,200 |   |
| Public services and other consumers      |       | 2,847                                      |       | 2,810 |   | 2,738 |   |
|                                     |       |                                       |       |   |   |   |   |
| Average rate (R$/MWh)                    |       | 277.51                                     |       | 244.74 |   | 254.49 |   |
| Total revenues (millions of R$)          |       | 10,994                                     |       | 10,497 |   | 10,191 |   |
| Sales to distributors:                   |       |                                       |       |   |   |   |   |
| Volume (GWh)                             |       | 14,039                                     |       | 11,162 |   | 12,755 |   |
| Average rate (R$/MWh)                    |       | 110.05                                     |       | 82.60 |   | 86.87 |   |
| Total revenues (millions of R$)(1)       |       | 1,545                                      |       | 922 |   | 1,108 |   |
| **Electricity Purchases from  Itaipu:**  |       |                                       |       |   |   |   |   |
| Volume (GWh)                             |       | 8,889                                      |       | 9,021 |   | 12,135 |   |
| Average cost (R$/MWh)                    |       | 97.31                                      |       | 86.02 |   | 82.40 |   |
| Total cost (millions of R$)              |       | 865                                        |       | 776 |   | 1,000 |   |

 

----

(1)                                  Does notinclude R$137 million, R$147 million and R$26 million relating to energytransactions on the CCEE during 2009, 2008 and 2007 respectively.

 

**Distribution Rates**

 

Ourresults of operations in the past have been significantly affected byfluctuations in the levels of rates that Cemig Distributionis permitted to charge for the generation and distribution of electricity. Therate-setting process in Brazil has historically been influenced by governmentattempts to control inflation. With the restructuring of the electric powersector in Brazil that commenced in 1995 and under the terms of the renewal ofthe concession agreement that we signed with ANEEL in 1997, the process bywhich rates are set has changed to a significant degree.

 

70

----

Table of Contents

 

ANEELhas approved extraordinary rate increases designed to compensate generation anddistribution companies for losses incurred as a result of the ElectricityRationing Plan. See “—Power Rationing and Government Measures to CompensateElectric Utilities.”

 

ANEELissued Resolution No. 626 on April 7, 2008, which established theresults of our second periodic rate revision. However these results wereconsidered provisional since ANEEL, by public auction, had been changing thelegislation regarding the revision process. ANEEL re-issued the result of CEMIG’s second period revision based onthe results of this public auction.  Thefinal components were as follows: (i) a 19.62% decrease in the Rate Adjustment Index; (ii) a1.88% decrease due to intra-annual variation of fixed costs, or CVA;(iii) a 7.38% increase due to the deferred regulatory asset; (iv) a4.29% increase due to the anticipation of subsidies on rates and; (v) a1.35% increase due to other financial adjustments.  When considering these financial components,the rates decreased, on average, by 8.48%. The difference between the final and the provisional rate revisionbetween April 8, 2008 and the re-issuing on April 7, 2009 wasconsidered in the 2009 annual adjustment. We expect to experience such ratedecreases periodically as our concession contracts are regulated under a pricecap regime.  Through the periodic raterevisions, our productivity gains are passed on to consumers through reductionsin the rates.

 

OnMarch, 24, 2009, ANEEL released the definitive results of the second periodicrate revision through Resolution No. 787. According to this resolution,the distribution tariffs of Cemig Distribution decreased by 19.62%.

 

ANEELissued Resolution No. 797 on April 07, 2009, which established ouraverage annual rate adjustment of 20.81%. The components of this increase wereas follows: (i) a 15.01% increase due to the Rate Adjustment Index;(ii) a 4.15% increase due to intra-annual variation of fixed costs;(iii) a 3.47% decrease due to the difference between the provisional andthe final result of the second periodic revision; (iv) a 3.47% increasedue to the anticipation of subsidies on rates granted to some types of consumersand (v) a 1.65% increase due to other financial adjustments.

 

OnApril 6, 2010 ANEEL established an average annual rate adjustment of7.58%. The components of this increase were as follows: (i) a 3.41%increase due to the Rate Adjustment Index; (ii) a 1.45% decrease due tointra-annual variation of fixed costs; (iii) a 6.35 % increase due to theanticipation of subsidies on rates granted to certain consumers and (iv) a5.59% decrease due to other financial adjustments.

 

The2010, 2009 and 2008 average annual rate adjustments and revision with theirrespective components are presented in the table below:

 
| ** **                                                            | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Average annual/periodic rate  adjustment**                          |       | 7.58       | %          | 20.81      | %          | (8.48      | )%         |
|                                                                  |       |       |       |       |       |       |       |
| **Components**                                                        |       |       |       |       |       |       |       |
| Rate adjustment index                                                 |       | 3.41       | %          | 15.01      | %          | (19.62     | )%         |
|                                                                  |       |       |       |       |       |       |       |
| Deferred regulatory asset                                             |       |       |       | 7.38       | %          |       |       |
|                                                                  |       |       |       |       |       |       |       |
| Intra-annual variation of fixed costs (CVA)                           |       | -1.45      | %          | 4.15       | %          | 1.88       | %          |
|                                                                  |       |       |       |       |       |       |       |
| Adjustment related to the re-issuing of the second  periodic revision |       |       |       | (3.47      | )%         |       |       |
|                                                                  |       |       |       |       |       |       |       |
| Anticipation of subsidies on rates                                    |       | 6.35       | %          | 3.47       | %          | 4.29       | %          |
|                                                                  |       |       |       |       |       |       |       |
| Other financial adjustments                                           |       | -5.59      | %          | 1.65       | %          | 1.35       | %          |
|                                                                  |       |       |       |       |       |       |       |

 

**Transmission Rates**

 

Therevenue adjustment of the electricity transmission grids owned by CEMIG, as specified the concession contract,occurs annually in June, affecting our July results. The contract alsoestablishes a four-year period between periodic revisions.

 

In2009, ANEEL performed our first periodic revision with the results beingretroactive to 2005, since the methodology and rules to be applied byANEEL were previously in development. The results reflect a reassessment of theentire asset base of Cemig Generation andTransmission and a review of permitted operational costs. ANEEL issuedResolution No. 836 on June 23, setting the

 

71

----

Table of Contents

 

resultsfor the utility’s transmission revenue requirement. The revision allowed anannual revenue increase of 5.35% which is retroactive to 2005. The revenuerecovery represents R$158 million and will be received within 24 months.

 

Theconcession contract provides that the revenue requirements are restated forinflation annually in accordance with the General Market Price Index, IGP-M.This IGP-M index rose 3.64% from June 2008 to May 2009.  Due to this periodic revision increasing thetransmission revenue requirement, the annual rate adjustment established by theregulator represented a 9.18% increase in rates in 2009.

 

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

 

Lowamounts of rainfall in 2000 and early 2001, vigorous growth in demand forenergy and Brazil’s significant dependence on electricity generated fromhydrological resources resulted in abnormally low water levels in manyreservoirs that are used to power Brazil’s major hydroelectric generationfacilities. In May 2001, the Federal Government announced several measuresrequiring reductions in electricity consumption in response to these conditions(the “Electricity Rationing Plan”). The power rationing measures ultimatelyceased on February 28, 2002.

 

OnDecember 12, 2001, the Federal Government authorized the creation of theGeneral Agreement of the Electricity Sector. The General Agreement of theElectricity Sector provides that electric power distribution and generationcompanies in Brazil, such as us, will be compensated for revenue losses causedby the reduction in amounts of energy sold and the purchase of energy on theCCEE, as applicable, due to the Federal Government-mandated rationing measures.Compensation is made by means of an extraordinary increase in the energy rateapplicable to future power sales and companies are entitled to use thisincreased rate for an average period of 74 months, which ended inMarch 2008. See Note 4 to our consolidated financial statements.

 

**Impact of Our Account Receivable from the State Government**

 

Wehave an account receivable from the State Government, referred to as the CRCAccount, that totaled R$1,824 million as of December 31, 2009. Ourliquidity is affected by payments made bythe State Government in connection with the CRC Account. The agreement betweenCEMIG and the State Government that governs the CRC Account receivable isreferred to as the CRC Account Agreement. The CRC Account Agreement has beenamended five times, as described below.

 

OnJanuary 24, 2001, the First Amendment to the CRC Account Agreementreplaced the monetary adjustment index of UFIR with the IGP-DI, retroactive toNovember 2000, since the UFIR was eliminated in October 2000.

 

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

 

Giventhe prior default by the State Government in the payment of amounts due underthe CRC Account Agreement since 2001, and in order to ensure the full paymentto us of the installments due by the State Government under the CRC Accountbalance, the Fourth Amendment to the CRC Account Agreement was signed onJanuary 23, 2006. Under the Fourth Amendment, the State Governmentirrevocably agreed to pay the outstanding CRC Account balance, corresponding toR$2,942 million at December 31, 2004, plus interest, by authorizing CEMIGto retain 65% of the ordinary dividends and interest on capital due to theState Government. The outstanding balance is subject to monetary correction forinflation by the variation in the IGP-DI inflation index and will bear interestat 8.18% per year, compounded semi-annually.

 

Underthe Fourth Amendment to the CRC Account Agreement, the State is required tomake 61 semi-annual payments due on June 30 and December 31 of eachyear. The Fourth Amendment applies retroactively to December 31, 2004, atwhich time there was an outstanding balance of R$2,941.6 million under the CRCAccount, with the first payment date being June 30, 2005 and the finalpayment being due on June 30, 2035. The semi-annual payments will beadjusted for inflation by the IGP-DI inflation index. The 65% of dividends andinterest on capital retained by CEMIG are to be applied in the following order:(i) the settlement of any past due installments, (ii) the settlementof the installment relating to the half-year in which dividend or interest oncapital takes place, (iii) pre-payment of up to two installments and(iv) amortization of the outstanding balance due under the CRC Account.

 

72

----

Table of Contents

 

AFifth Amendment to the CRC Account Agreement was executed by CEMIG and theState Government on September 12, 2007. The Fifth Amendment adjusts theoutstanding balance of the CRC Agreement to R$2,839.5 million in accordancewith a provision in the Fourth Amendment in which the parties recognized thatthere was a disagreement regarding the outstanding balance of the CRC Agreementat December 31, 2004. Approval for the Fifth Amendment to the CRC AccountAgreement was also obtained from the CEMIG CRC AccountSecuritization Fund (CEMIG*—Fundode Investimento em Direitos Creditorios Conta CRC*), or FIDC, towhich the CRC Account receivables were transferred in January 2006.

 

Ifthe retention of ordinary dividends and interest on capital is not sufficientto cover the applicable installment, beginning on January 1, 2008, CEMIGis entitled to retain up to 65% of any extraordinary dividends or interest onequity due to the State Government for the payment of that installment.Furthermore, if the sum of 65% of the ordinary dividends and interest andcapital and extraordinary dividends on interest and capital is not sufficientto cover an installment due, CEMIG is entitled to retain 100% of such dividendsand interest on capital, beginning in the six-month period immediatelyfollowing that of the past due date of the past due installment. In addition,if there is a reduction in the ownership of CEMIG by the State Government, theretention percentage will be automatically adjusted upward such that the amountof the dividend retained will remain the same as the amount equal to 65% ofdividends based on the current ownership of CEMIG by the State Government.

 

InJanuary 2006, we created the CEMIG CRC AccountSecuritization Fund (CEMIG*—Fundode Investimento em Direitos Creditorios Conta CRC*), or the FIDC.We assigned all our receivables under the CRC Account Agreement to the FIDC.The value of the CRC Account receivables transferred to the FIDC was R$1,659million, as of January 27, 2006 and the capital structure of the FIDC iscomposed of R$900 million of senior quotas held by third parties andapproximately R$759 million of subordinated quotas held by us. The FIDC isfully consolidated by us and the senior quotas are recorded as long-termfinancing.

 

TheCompany has recorded a provision for losses on the CRC Account receivable underthe Fourth Amendment of the CRC Account Agreement in the amount of R$115million in 2009, R$492 million in 2008 and R$372 million in 2007 and a reversalprovision for losses of R$99 million in 2006. Our estimate of future net incometo calculate such provision did not take into account the new assetacquisitions foreseen in our long-term strategic plan.

 

**ExchangeRates**

 

Substantiallyall of our revenues and operating expenses are denominated in *reais.*Although our electricity purchasesfrom Itaipu are denominated in U.S. dollars, the related foreign exchange riskis no longer reflected in our operating revenues and operating expenses due torate legislation changes in 2001 which allow electricity utilities such as usto record exchange rate losses related to Itaipu purchases as deferredregulatory assets. However, we have foreign currency-denominated debt. As aresult, in reporting periods when the *real*declines against the dollar or other foreign currencies in which our debt isdenominated, our operating results and financial position are adverselyaffected. Foreign exchange gain or loss and monetary variation gain or loss mayimpact our results of operations in periods in which there are wide swings inthe value of the *real* relative tothe dollar or high inflation. We have a number of financial and other contractsunder which we owe, or are entitled to, amounts in respect of monetaryvariation as measured by an index of price inflation in Brazil. In 2009, weused financial instruments such as interest rate swaps in order to reduce therisk from exchange rate fluctuations. As of December 31, 2009, we hadentered into swap agreements in the notional amount of US$8 million inorder to change the original interest rate of certain financing from aninterest rate calculated based on the U.S. dollar variation to an interest ratecalculated based on the Interbank Certificates of Deposit rate (*Certificado de Depósito Interbancário*), or CDI rate.  See Notes 2(d), 14, 22, 24 and 25 to ourconsolidated financial statements.

 

**Unbundling**

 

In2004, we undertook a reorganization of our corporate structure to comply withLaw 10,848/04, which establishes that a distribution company may not exerciseother activities such as the generation and transmission of electric energy.Two wholly-owned subsidiaries were created, Cemig Generation and Transmission****and Cemig Distribution, which carryout the activities of electricity generation and transmission and electricitydistribution, respectively. This process was finalized by ANEEL with respect toour distribution and transmission concessions through amendments to theexisting concession contracts, and was finalized with respect to the generationconcession upon ANEEL’s convocation to sign amendments to the existinggeneration contracts, on October 22, 2008.

 

Followingthe unbundling of CEMIG’s operations, ANEEL determined that CEMIG, Cemig Distribution and Cemig Generation andTransmission must prepare a formal ‘cooperation agreement’ and submit it forapproval by ANEEL. This agreement is to govern common use of human or physicalresources when they are shared by the concession holders and the division andreimbursement of costs incurred by each company. The agreement was approved onOctober 29, 2008, by means of ANEEL’s Dispatch No. 3924-SFF.

 

73

----

Table of Contents

 

*Financial Reporting and Tax Considerations*

 

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

 

**Year Ended December 31, 2009 Compared to Year EndedDecember 31, 2008**

 

*Net Operating Revenues*

 

Netoperating revenues increased 12.9% from R$9,828 million in 2008 to R$11,100million in 2009.

 
| ** **                                            | ** ** | **2009**                 | ** ** | **%**** of net  operating  revenues** | ** ** | **2008**                 | ** ** | **%**** of net  operating  revenues** | ** ** | **2009  versus  2008 %** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **(in millions of  R$)** | ** ** | ** **                                      | ** ** | **(in millions of  R$)** | ** ** | ** **                                      | ** ** | ** **                    | ** ** |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Electricity sales to final consumers                  |       | 10,994                   |       | 99.0                                            |       | 10,497                   |       | 106.81                                          |       | 4.7                           |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Electricity sales to the interconnected power  system |       | 1,682                    |       | 15.2                                            |       | 1,069                    |       | 10.9                                            |       | 57.3                          |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Use of basic transmission and distribution  networks  |       | 1,999                    |       | 18.01                                           |       | 1,865                    |       | 19.0                                            |       | 3.3                           |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Other operating revenues                              |       | 277                      |       | 2.5                                             |       | 241                      |       | 2.4                                             |       | 14.9                          |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Tax on revenues                                       |       | (3,852                   | )          | (34.7                                           | )          | (3,844                   | )          | (39.1                                           | )          | —                        |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                          |       |
| Total net operating revenues                          |       | 11,100                   |       | 100.0                                           |       | 9,828                    |       | 100.0                                           |       | 12.3                          |       |

 

Revenuesfrom electricity sales to final consumers increased 4.7% from R$10,497 millionin 2008 to R$10,994 million in 2009 due to rate adjustments of a 6.2% increasein April 2009 and a 0.7% decrease in the volume of our electricity salesin 2009, offset by the 12.8% decrease in the average tariff in 2009. The TUSDcharges related to the use of the local distribution network of the FreeConsumers, which began to be charged separately in 2004 and recorded under theitem “Use of basic transmission and distribution networks,” were R$1,121million in 2009 compared to R$1,266 million in 2008. This decrease is due to anaverage rate decrease of 3.15% and also a decrease in the volume of the use ofdistribution networks related to the world economic crisis. Electricity salesto final customers and the TUSD revenues together increased 3.0% in 2009compared to 2008.

 

Electricitysales to the interconnected power system were R$1,682 million in 2009, a 57.3%increase compared to R$1,069 million in 2008. The volume of energy sold tointerconnected power system supply in 2009 was 14,039 GWh, which compares with11,162 GWh in 2008. The average sale tariff in 2009 was R$125.00/MWh toR$145.77/MWh compared to R$82.60/MWh in 2008 and to R$86.87/MWh in 2007.

 

Incomefrom the use of the basic transmission network increased R$134 million, or7.2%, from R$1,865 million in 2008 to R$1,999 million in 2009. This variationarises mainly from the extraordinary revenue recorded in 2009 of R$158 million,due to the Tariff Review of Cemig Generation and Transmission, the effects ofwhich were backdated to the whole period between July 1, 2005 and June 30,2009.  See Note 27 to our consolidatedfinancial statements.

 

Taxeson revenues were R$3,852 million in 2009, compared to R$3,844 million in 2008,and showed no significant variation. Taxes on revenues consist of:(i) VAT, assessed at an average rate of 21% on electricity sales to finalconsumers, and VAT billed to

 

74

----

Table of Contents

 

consumersrelated to the deferred regulatory assets; (ii) COFINS, assessed at a rateof 7.6%; and (iii) PASEP, assessed at a rate of 1.65%. See Note 19 to ourconsolidated financial statements.

 

*Operating Costs and Expenses*

 

Operatingcosts and expenses increased 13.8% to R$8,581 million in 2009 compared toR$7,541 million in 2008. This increase was principally due to electricitypurchased for resale use of basic transmission network, personnel expenses,regulatory charges and third-party services.

 

Otherexpenses increased 18.5% from R$410 million in 2008 to R$486 million in 2009,primarily due to R$241 million of provisions for contingencies related todoubtful accounts and civil lawsuits in 2009, compared to provisions of R$116million in 2008. See Note 20 to our consolidated financial statements

 
| ** **                                                    | ** ** | **2009**                 | ** ** | **% of net  operating  revenues** | ** ** | **2008**                 | ** ** | **% of net  operating  revenues** | ** ** | **2009 versus  2008 - %** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | **(in millions  of R$)** | ** ** | ** **                                  | ** ** | **(in millions  of R$)** | ** ** | ** **                                  | ** ** | ** **                               | ** ** |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Electricity purchased for resale                              |       | (3,061                   | )          | (27.6                                       | )          | (2,267                   | )          | (23.1                                       | )          | 35.0                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Use of basic transmission network                             |       | (756                     | )          | (6.8                                        | )          | (634                     | )          | (6.5                                        | )          | 19.2                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Depreciation and amortization                                 |       | (711                     | )          | (6.4                                        | )          | (769                     | )          | (7.8                                        | )          | (7.5                                     | )          |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Personnel                                                     |       | (1,190                   | )          | (10.7                                       | )          | (1,004                   | )          | (10.2                                       | )          | 18.5                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Regulatory charges                                            |       | (1,142                   | )          | (10.3                                       | )          | (1,024                   | )          | (10.4                                       | )          | 11.5                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Third-party services                                          |       | (729                     | )          | (6.6                                        | )          | (605                     | )          | (6.2                                        | )          | 20.5                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Employee post-retirement benefits                             |       | (176                     | )          | (1.6                                        | )          | (277                     | )          | (2.8                                        | )          | (36.5                                    | )          |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Materials and supplies                                        |       | (105                     | )          | (1.0                                        | )          | (170                     | )          | (1.7                                        | )          | (38.2                                    | )          |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Reversion (Provision) for loss on deferred  regulatory assets |       | 8                        |       | 0.1                                         |       | (19                      | )          | (0.2                                        | )          | —                                   |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Employee profit sharing                                       |       | (233                     | )          | (2.1                                        | )          | (362                     | )          | (3.7                                        | )          | (35.6                                    | )          |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Other                                                         |       | (486                     | )          | (4.4                                        | )          | (410                     | )          | (4.2                                        | )          | 18.5                                     |       |
|                                                          |       |                     |       |                                        |       |                     |       |                                        |       |                                     |       |
| Total operating costs and expenses                            |       | (8,581                   | )          | (77.3                                       | )          | (7,541                   | )          | (76.7                                       | )          | 13.8                                     |       |

 

Electricitypurchased for resale consists primarily of purchases from Itaipu throughEletrobras and competitive biddings. We are required under applicableregulations to purchase part of Itaipu’s capacity at U.S. dollar-denominatedprices. We also purchase electricity from the CCEE and through bilateralcontracts. Electricity purchased for resale increased 35.0% from R$2,267million in 2008 to R$3,061 million in 2009. The amounts of electricitypurchased for resale reported in the income statement refer to the amounts thatwere in fact included in the calculation of the tariff to be applied, in accordancewith FASB ASC Topic 980 — Regulated Operations (FASB Statement No. 71 -Accounting for the Effects of Certain Types of Regulation. See Note 20 to ourconsolidated financial statements.

 

Chargesfor use of basic transmission network mainly correspond to the cost oftransporting electricity in the Brazilian basic transmission network which isprorated among the Brazilian distribution companies. Charges for use of thebasic transmission network are fixed costs, which increased 19.2% from R$634million in 2008 to R$756 million in 2009. This increase in costs is due to anincrease of 18.01% in the rates for the use of basic transmission network and asmall increase in the amount of electricity capacity assigned with thetransmission companies. The amount reported in the income statement refers tothe amounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation.”

 

Depreciationand amortization expenses decreased 7.5% from R$769 million in 2008 to R$711million in 2009. This decrease arises from fixed assets that were fullydepreciated during the fiscal year of 2008 and 2009.

 

75

----

Table of Contents

 

Personnelexpenses increased 18.5% from R$1,004 million in 2008 to R$1,190 million in2009. This increase was due to: [(i) salary increases of 7.26% and 4.88%given to employees in November 2008 and 2009, respectively;(ii) dismissal expenses of R$206 million in 2009, under the TemporaryVoluntary Dismissal Program; and (iii) lower transfer of costs frompersonnel expenses to works in progress (R$151 million in 2009 compared toR$161 million in 2008) due to less capital expenditure activity in 2009. SeeNote 20 to our consolidated financial statements.

 

Regulatorycharges increased 11.5% from R$1,024 million in 2008 to R$1,142 million in2009, primarily due to the increase of R$46 million in the fuel usage quota andan increase of R$44 million in energy development account. The fuel usage quotarepresents contributions made by the electricity company concessionaires tosubsidize the cost of fuel used in the thermoelectric energy generating processin the Brazilian energy system. The amounts reported in the income statementrelated to regulatory charges refer to the amounts that were in fact includedin the calculation of the tariff to be applied, in accordance with FASB ASCTopic 980.

 

Third-partyservices expense increased 20.5% from R$605 million in 2008 to R$729 million in2009. The increase was due mainly to higher costs in 2009 related tomaintenance and conservation of installations and equipment and outsourcingservices, tax collecting agents and outsourcing services.

 

Employeepost-retirement benefits expenses decreased 36.5% from R$277 million in 2008 toR$176 million in 2009.  These expensesprimarily represent interest on the actuarial liabilities net of the expectedreturn on plan assets, as estimated by an external expert. The lower expense in2009 arose from the higher profitability for the plan assets compared to theincrease of the interest rates, used to calculate our Projected BenefitObligation. See Note 16 to our consolidated financial statements.

 

Werecorded a reversion for losses on deferred regulatory assets of R$8 million in2009 compared to a provision for losses R$19 million in 2008. The reversion(provision) recorded is related to the amounts that CEMIG receives from otherdistribution companies in connection with energy transactions on the CCEE/MAEduring the Electricity Rationing Plan. These distribution companies have alimited time, as stipulated by ANEEL, to transfer the amounts owed to us. SeeNote 4 to our consolidated financial statements.

 

Employeeprofit sharing decreased 35.6% from R$362 million in 2008 to R$233 million in2009. This decrease is due to a lower payment amount established under thecollective labor agreements entered into by CEMIG and the labor unions inNovember 2009. See Note 21 to our consolidated financial statements.

 

Otherexpenses increased 18.5% from R$410 million in 2008 to R$486 million in 2009,primarily due to provision for contingencies in the amount of R$177 million dueto an agreement with a major consumer partially offset by R$31 million ofreversion provision for contingencies related to labor claims.  See Notes 17 and 20 to our consolidated financial statements.

 

*Operating Income*

 

Asa result of the foregoing, we had operating income of R$2,519 million in 2009compared to operating income of R$2,287 million in 2008.

 

*Financial Income, Net*

 

Financialincome net, includes (i) financial income, which is mainly comprised ofinterest and a 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 expenses, which are 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, which was extinguished on January of 2008, foreign exchange losses,monetary restatement losses, monetary restatement of deferred regulatoryliabilities and other expenses. We had net financial expense of R$109 millionin 2009 compared to net financial income of R$17 million in 2008, principallydue to a 64.7% decrease in monetary restatements on deferred regulatory assetsnet of liabilities in 2009. This decrease mainly resulted from a reduction inassets related to the deferred rate adjustment in 2009 compared to 2008, due toreceipt of values receivable into electricity energy accounts paid by clients.

 

*Non-Operating Income*

 

Wehad non-operating income of R$165 million in 2009 compared to non-operatingincome of R$204 million in 2008. The non-operating income recorded in 2009 isrelated to our investment in Light and other jointly controlled companies.  See Note 9 to our consolidated financialstatements.

 

76

----

Table of Contents

 

*Income Taxes*

 

Incometaxes were an expense of R$807 million on pre-tax income of R$2,575 million in2009, compared to an expense of R$755 million on pre-tax income of R$2,508million in 2008. The main difference in 2009 between income tax calculated atthe statutory rate and the income tax expense recorded is the tax benefitmainly due to equity in investees and to interest on capital. See Note 5 to ourconsolidated financial statements.

 

*Net Income*

 

Asa result of the foregoing, we had a net income of R$1,768 million in 2009compared to net income of R$1,753 million in 2008.

 

*Other Comprehensive Income (Loss)*

 

Othercomprehensive income was R$253 million in 2009 compared to other comprehensiveincome of R$299 million in 2008. This variation was due to an increase in theunfunded status of post-retirement benefits in 2009, as a result of a higherincrease in the plan assets compared to the increase in the projected benefitobligation in that year. The increase of the plan assets was due to a higherprofitability of the equity securities investments in 2009 compared to 2008..

 

*Comprehensive Income*

 

Asa result of the factors stated above, comprehensive income was R$2,021 millionin 2009 compared to R$2,052 million in 2008.

 

**Year Ended December 31, 2008 Compared to Year EndedDecember 31, 2007**

 

*Net Operating Revenues*

 

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

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

 

Revenuesfrom electricity sales to final consumers increased 3.00% from R$10,191 millionin 2007 to R$10,497 million in 2008 due to rate adjustments of a 5.2% increasein April 2007 and a 6.4% increase in the volume of our electricity salesto final consumers in 2008, offset by the 3.83% decrease in the average tariffin 2008, as per the reduction in the tariffs of Cemig Distributionby the Tariff Review on April 8, 2008. The TUSD charges related to the useof the local distribution network of the Free Consumers, which began to becharged separately in 2004 and recorded under the item “Use of basictransmission and distribution networks,” were R$1,266 million in 2008 comparedto R$1,173 million in 2007. Electricity sales to final customers and the TUSDrevenues together increased 4.6% in 2008 compared to 2007.

 

77

----

Table of Contents

 

Electricitysales to the interconnected power system were R$1,069 million in 2008, a 5.7%decrease compared to R$1,134 million in 2007. The volume of energy sold tointerconnected power system supply in 2008 was 11,162 GWh, which compares with12,755 GWh in 2007. The average sale tariff in 2008 was R$82.60/MWh compared toR$86.87/MWh in 2007.

 

Incomefrom the use of the basic transmission network increased R$160 million, or9.4%, from R$1,705 million in 2007 to R$1,865 million in 2008. This variationarises from: (i) the July 2008 increase of 11.8% in the permittedrevenue in the transmission sector from the adjustment made by applying theIGP-M inflation index over the 12 previous months; and (ii) operationalstartup of network expansions, resulting in the Regulator allowing a higherrevenue level. Additionally there was a R$35 million reduction in revenue fromthe basic grid in 2007, due to the review, as per ANEEL decisions, of theannual permitted revenues linked to the new facilities of the basic grid andother transmission facilities for electricity transmission concession holders.See Note 19 to our consolidated financial statements.

 

Taxeson revenues were R$3,844 million in 2008, compared to R$3,836 million in 2007,and showed no significant variation. Taxes on revenues consist of:(i) VAT, assessed at an average rate of 21% on electricity sales to finalconsumers, and VAT billed to consumers related to the deferred regulatoryassets; (ii) COFINS, assessed at a rate of 7.6%; and (iii) PASEP,assessed at a rate of 1.65%. See Note 19 to our consolidated financialstatements.

 

*Operating Costs and Expenses*

 

Operatingcosts and expenses increased 2.6% to R$7,541 million in 2008 from R$7,351million in 2007. This increase was principally due to electricity purchased forresale, personnel expenses and employee post-retirement benefits, partiallyoffset by a lower provision for loss on deferred regulatory assets anddepreciation and amortization.

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

 

Electricitypurchased for resale consists primarily of purchases from Itaipu throughEletrobras and competitive biddings. We are required under applicableregulations to purchase 17.3% of Itaipu’s capacity at U.S. dollar-denominatedprices. We also purchase electricity from the CCEE and through bilateralcontracts. Electricity purchased for resale increased 5.6% from R$2,147 millionin 2007 to R$2,267 million in 2008. The amounts of electricity purchased forresale reported in the income statement refer to the amounts that were in factincluded in the calculation of the tariff to be applied, in accordance withSFAS 71 “Accounting for the Effects of Certain Types of Regulation.” See Note20 to our consolidated financial statements.

 

78

----

Table of Contents

 

Charges for use of the basic transmission networkmainly correspond to the cost of transporting electricity in the Brazilianbasic transmission network which is prorated among the Brazilian distributioncompanies. Charges for use of the basic transmission network are fixed costs,which increased 12.4% from R$564 million in 2007 to R$634 million in 2008. Theamount reported in the income statement refers to the amounts that were in factincluded in the calculation of the tariff to be applied, in accordance withSFAS 71 “Accounting for the Effects of Certain Types of Regulation.”

 

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

 

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

 

Regulatory charges increased 5.9% from R$967 millionin 2007 to R$1,024 million in 2008, primarily due to the increase of R$34million in the fuel usage quota and an increase of R$34 million in globalreserves for reversion quota. The fuel usage quota represents contributionsmade by the electricity company concessionaires to subsidize the cost of fuelused in the thermoelectric energy generating process in the Brazilian energysystem. The amounts reported in the income statement related to regulatorycharges refer to the amounts that were in fact included in the calculation ofthe tariff to be applied, in accordance with SFAS 71 “Accounting for theEffects of Certain Types of Regulation.”

 

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

 

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

 

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

 

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

 

*Operating Income*

 

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

 

*Financial Income, Net*

 

Financial income net, includes (i) financialincome, which is mainly comprised of interest and a monetary restatement of ouraccount receivable from the State Government, investment income earned, latecharges on overdue electricity bills, foreign exchange gains, monetaryrestatement on deferred regulatory assets and (ii) financial expenses,which are mainly comprised of interest expense on loans and financing, the *Contribuição Provisória sobre a Movimentação ouTransmissão de Valores e de Créditos e Direitos de Natureza Financeira*(a financial transaction tax), or CPMF, which was extinguished onJanuary of 2008, foreign exchange losses, monetary restatement losses,monetary restatement of deferred regulatory liabilities and other expenses. Wehad net financial income of R$17 million in 2008 compared to net financialexpense of R$48 million in 2007, principally due to a 47.0% decrease inmonetary restatements on deferred regulatory assets net of liabilities in 2008.This decrease mainly resulted from a reduction in assets related to 

 

79

----

Table of Contents

 

the deferred rate adjustment in 2008 compared to 2007,due to receipt of values receivable into electricity energy accounts paid byclients.

 

*Non-Operating Income*

 

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

 

*Income Taxes*

 

Income taxes were an expense of R$755 million onpre-tax income of R$2,508 million in 2008, compared to an expense of R$685million on pre-tax income of R$2,303 million in 2007. The main difference in2008 between income tax calculated at the statutory rate and the income taxexpense recorded is the tax benefit mainly due to equity in investees. See Note5 to our consolidated financial statements.

 

*Net Income*

 

As a result of the foregoing, we had a net income ofR$1,753 million in 2008 compared to net income of R$1,618 million in 2007.

 

*Other Comprehensive Income (Loss)*

 

Other comprehensive income was R$299 million in 2008compared to other comprehensive loss of R$400 million in 2007. This variationwas due to an increase in the unfunded status of post-retirement benefits in2007, as a result of a higher increase in the projected benefit obligationcompared to the increase in the plan assets in that year.

 

*Comprehensive Income*

 

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

 

**Liquidity and Capital Resources**

 

Our business is capital intensive. Historically, wehave required capital to finance the construction of new generation facilitiesand the expansion and modernization of existing generation, transmission anddistribution facilities. Our liquidity requirements are also affected by ourdividend policy. See “Item 8. Financial Information—Dividend Policy andPayments.” We have funded our liquidity and capital requirements primarily withcash provided by operations and, to a lesser extent, with proceeds offinancings. We believe that our current cash reserves, cash provided byoperations and anticipated proceeds from financings will be sufficient duringthe next 12 months to meet our liquidity requirements.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents as of December 31, 2009were R$3,904 million compared to R$1,969 million as of December 31, 2008and R$1,784 million as of December 31, 2007. None of our cash or cashequivalents was held in currencies other than *reais*as of December 31, 2009.

 

*Cash Flow from Operating Activities*

 

Net cash provided by operating activities in 2009, 2008and 2007 totaled R$3,319 million, R$2,961 million and R$2,836 million,respectively.  The increase in cashprovided by operating activities in 2009 compared to 2008 was due mainly to thehigher net income in 2009 adjusted by non-cash expenses and revenues. Theincrease in 2008 compared to 2007 was due mainly to the higher

 

80

----

Table of Contents

 

net income in 2008. Significant non-cash items affecting earnings included depreciation andamortization expense as a result of our on-going capital improvements projects,recognition of deferred regulatory assets and liabilities, the effects ofmonetary variation and exchange rate variations and deferred income taxes.

 

*Cash Flow from Investing Activities*

 

Net cash provided by investing activities during 2009,2008 and 2007 amounted to R$3,177 million, R$1,280 million and R$1,114 million,respectively. The increase in cash used in investing activities in 2009compared to 2008 is due to acquisition of investments in affiliates. Theinvestments in affiliates amounted to R$2,014 million, R$220 million and R$26million in 2009, 2008 and 2007, respectively. Capital expenditures from theacquisition of property, plant and equipment amounted to R$851 million, R$971million and R$1,120 million in 2009, 2008 and 2007, respectively. See “Item 4.Information on the Company—Capital Expenditures and Investments in Affiliates”for more detail regarding how these capital expenditures were applied by us.

 

*Cash Flow from Financing Activities*

 

We are committed to lengthening our debt profilethrough long-term financing vehicles at low interest rates, the maturities andobligations of which are compatible with the nature of our business, which iscapital-intensive. We seek to balance the proportions of short and long-termfinancings and not to increase our exposure to short-term rates, nor undergoany liquidity pressures. Through this policy, we have succeeded in improvingour credit ratings, reducing our cost of capital and improving our debtprofile. Our principal form of funding is through the issuance of debenturesand the issuance of medium-term notes (known in Brazil as “commercial paper”),the latter being mostly used to meet short-term obligations.

 

Net cash used from financing activities during 2009was R$1,793 million, comprised of the proceeds from issuance of long-termfinancing of R$3,614 million, partially offset by repayment of R$884 million of*real*and foreigncurrency-denominated long-term financing and the payment of R$937 million individends and interest on capital.

 

Net cash from financing activities during 2008 wasR$1,496 million, comprised of the repayment of R$807 million of *real*and foreign currency-denominatedlong-term financing and the payment of R$865 million in dividends and intereston capital, partially offset by R$176 million in proceeds from long-termfinancings.

 

Net cash from financing activities during 2007 wasR$1,046 million, comprised of the repayment of R$1,134 million of *real* and foreign currency-denominatedlong-term financing and the payment of R$1,334 million in dividends andinterest on capital, partially offset by R$589 million and R$833 million inproceeds from long-term financings and short-term loans, respectively.

 

Our indebtedness from loans, financings and debenturesas of December 31, 2009 was R$9,277 million, composed of R$5,364 millionof long-term debt and R$3,913 million of the current portion of long-term debt.This compares with indebtedness from loans, financings and debentures as ofDecember 31, 2008 of R$6,511 million, composed of R$5,314 million oflong-term debt and R$1,197 million of the current portion of long-term debt. Ofour long-term debt (including the current portion) at December 31, 2009,R$190 million was denominated in foreign currencies (R$171 million of which wasU.S. dollar-denominated) and R$9,087 million was denominated in *reais.*See Note 14 to our consolidatedfinancial statements.

 

Our financial obligations are usually guaranteed byCEMIG, as the holding company of our group and/or by promissory notes issued inconnection to such financial obligations.

 

In 2009, we performed and executed the followingfinancial agreements and issuances:

 

·      *Commercial Papers issued by Cemig Generation andTransmission*. On October 30, 2009, we performed our  thirdissuance of commercial papers in the Brazilian market, through our subsidiaryCemig Generation  and Transmission, in the amount of R$2.7 billion, with interestpayable at 113% of the Taxa DI (Depósito Interfinanceiro), and due within 180days from the commercial papers’ subscription. Such issuance was guaranteed byCompanhia Energética de Minas Gerais - CEMIG. The commercial papers  havebeen redeemed in advance by Cemig Generation and Transmission, onMarch 10, 2010.

 

·      *Loan agreements with BNDES executed by CemigGeneration and Transmission*. On March 9, 2009, our subsidiaryCemig Generation  and Transmission executed a loan agreement with BNDES inthe total amount of R$122 million, with the purpose of developing the Baguaripower plant, with interest payable at TJLP rate plus 2.34%. Its maturity dateis July 15, 2026. Companhia Energética de Minas Gerais - CEMIG is theguarantor and responsible for the payment of such loan agreement. As ofDecember 31, 2009, the outstanding debt is R$124 million.

 

·      *Loan agreements with Banco do Brasil S.A. executed byCemig Generation and Transmission*. Cemig Generation andTransmission, with the purpose of rolling over existing debt, executed threeloan agreements with Banco do Brasil S.A., in the amount of  R$57.3million (on October 22, 2009), R$152.5 million (on October 26, 2009)and  R$428.4 million (on October 30, 2009), with maturity datesfalling on October 22, October 26 and October 30, 2012,respectively. These loan agreements bear interest of 110% of the CDI rate perannum and are guaranteed by CEMIG. The outstanding debt onDecember 31, 2009, was R$ 57.3 million, R$155.1 million and  R$435.0million, respectively.

 

81

----

Table of Contents

 

·      *Loan agreements with Banco do Brasil S.A. executed byCEMIG Distribution*.  In the period between October andDecember 2009, Cemig Distribution, with the purpose of rolling overexisting debt, executed eight  loan agreements with Banco do Brasil S.A.,in the total amount of  R$90.6 million, with a maturity date in 2012.These loan agreements bear interest of 110% of the CDI rate per annum and areguaranteed by CEMIG. The total amount of outstanding debt under these loanagreements on December 31, 2009 was R$ 91.4 million.

 

We are subject to financial covenants contained insome of our debt agreements that require us to maintain certain financialratios.  These ratios are computed basedon our financial statements prepared in accordance with accounting practicesadopted in Brazil.  These and othercovenants could limit our ability to support our liquidity and capitalrequirements. As of December 31, 2009, we have been in non-compliance withsome financial covenants provided in some of our debt agreements.  In regard to such non-compliance, we haveobtained waivers from the respective creditors that they will not exercisetheir rights to demand immediate payment of the total amount due of theagreements until January 1, 2011. See “Item 13. Defaults, DividendArrearages and Deliquencies.”

 

Given the current portion of our financings in theamount of R$3,913 million due in 2010, we need funds in the short term to payand refinance these obligations. Notwithstanding the fact that we have alreadyrolled over****part of theseobligations, through the issuance of R$2,700 million in long-term notes, wewill still need funds in the short term to pay or refinance the remainder ofthese obligations.

 

As a state-controlled company, we are subject torestrictions under current financing laws and regulations in Brazil on ourability to obtain financing in certain situations. 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 inBrazil are subject to risk exposure restrictions with regard to stategovernments, governmental agencies and state-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 CEMIG— We are subject to rules and limitsapplied to levels of public sector borrowing and to restrictions on the use ofcertain funds we raise, which could prevent us from obtaining financing.”

 

We currently plan to make capital expenditures relatedto our property, plant, and equipment of approximately  R$1,401 million in 2010. We disbursed a totalof  R$117 million under our capitalexpenditure program in the first quarter of 2010 and have commitments to fundsubstantially all of the remaining R$1,284 million. The principal uses of these capital expenditures areexpected to be for expansion of our distribution infrastructure. We also havecommitted  R$132 million to announcedinvestments in affiliates in 2010. In 2009, we funded our capital expendituresand investments in affiliates and met our liquidity requirements through acombination of cash flow from operations and financings. We expect that we willfund our proposed capital expenditures, investments in affiliates, andacquisitions and meet our other liquidity requirements in 2010 through acombination of cash flow from operations and financings. Because we relyprimarily on cash generated from operations to fund our liquidity and capitalrequirements, factors that cause our revenues and net income to increase ordecrease could have a corresponding effect on our access to sources ofliquidity.

 

Over the long term, we anticipate that it will benecessary to make significant capital expenditures in connection with themaintenance and upgrading of our generation, transmission and distributionfacilities, and we expect to employ a variety of liquidity sources, such ascash flow from operations and financings, in connection with such requirements.See “Item 3. Key Information—Risk Factors” for a discussion of certain mattersthat might adversely affect our liquidity position.

 

**Research and 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 use of alternative energy sources, environmentalcontrol and power system performance, and safety optimization.

 

In 2009, we spent R$10.9 million for R&D.Nevertheless, R$58.6 million has been transferred to the Fundo Nacional deDesenvolvimento Científico e Tecnológico, or FNDCT, a federal research anddevelopment fund; and R$29.3 million has been transferred to Empresa de PesquisaEnergética, or EPE (the federal power planning company). During the years endedDecember 31, 2009, 2008 and 2007, we spent an aggregate of R$28.3 million,on research and development projects, and we transferred an aggregate ofapproximately R$100.9 million to FNDCT during that time. We expect to spend atotal of approximately R$23.3 million on research and development in 2010. Weconduct these efforts in accordance with Federal law, which requires Brazilianpower utilities to spend at least 1% of their net revenue on research anddevelopment projects and energy efficiency programs (including transfers toFNDCT and EPE), as well as in accordance with our strategic corporate plans.

 

82

----

Table of Contents

 

In accordance with ANEEL instructions, we recorded aliability in 2009 for future expenditures on research and development programsand energy efficiency programs in the amount of R$308.8 million relating toamounts that had already been included in the determination of our tariffs in2009.

 

We have dedicated a substantial portion of ourresearch and development activities to the development of the use ofalternative energy sources, including wind, solar and biomass power generation.

 

In 2009, the Strategic Technology Management Center,CGET, an independent nonprofit entity whose partners are subsidiaries of CEMIG,executed about 15 scientific and technological agreements with universities,research centers and the equipment industry, to support the implementation ofour research and development projects.

 

**Trends**

 

The purchase of energy from the Itaipu Power Plantconstituted approximately 32% of the captive load of Cemig Distribution in 2009.To meet the 68% remaining energy needs of Cemig Distribution in 2009, we boughtenergy through our bilateral contracts (6%) and through contracts in the ACR(57%), received energy from the Proinfa program (2%), and bought from the spotmarket on CCEE. For more details about the energy purchased from CemigDistribution in the ACR, see “Item 4. Information on the Company—The BrazilianPower Industry—The Regulated Market (the ACR or the Pool).”

 

As a public service utility, we are subject toregulations issued by the Federal Government as described in “Item 4.Information on the Company—The Brazilian Power Industry.” Therefore, any changein the regulatory framework may affect us significantly either with respect toour revenue if the change relates to prices or with respect to our operatingexpenses if the change relates to costs incurred to provide service toconsumers.

 

We do not anticipate any significant change inrevenues with respect to the transmission and distribution businesses since theregulation in place meets the plans of the Federal Government administration.

 

The rate readjustment was applied differently todifferent client categories with industrial clients having higher readjustmentsthan residential clients. For more information, see “Item 4. Information on theCompany—Brazil’s Energy Market—Rates” and “Item 4. Information on the Company—The Brazilian Power Industry—Rates for the Use of the Distribution andTransmission Systems.” This difference in application may have an impact onsales volume growth in the future since large industrial clients tend todevelop co-generation projects to supply energy to themselves at a lower cost.We are taking steps to mitigate this impact through the connection of newclients of different categories as well as clients based in other states. Inthe coming years, we expect electricity consumption to grow toward thepre-rationing level based on an assumption that economic activity in Brazilwill continue to grow. However, there can be no assurance that this will occur.

 

We expect that our Parcel A costs will increase at arate well above inflation, which will require further rate increases. We expectour Parcel B costs to rise more or less at the rate of inflation since most ofthese cost items are adjusted for inflation according to contractual terms. Wehave taken measures to cut operating costs so as to meet benchmarks proposed byANEEL in the periodic rate review process.

 

With respect to expansion, we believe that theextension of electricity services to all potential clients represents asignificant trend in our industry. Utilities are currently required to provideservice to all potential clients according to a schedule established by ANEEL.Pursuant to Federal Law No. 10,438 of April 26, 2002, as amended, andthe relevant ANEEL resolution, financing for this extension of electricityservices is to come from the funds of the Energy Development Account (*Conta de Desenvolvimento Energético*), orCDE, and the Global Reversion Fund (*ReservaGlobal de Reversão*), or RGR. According to the Light for All (*Luz para Todos*)**Program, launched by the MME and Eletrobras to promoteextension of electricity services in rural areas, in its second and thirdphases, 26.5% of the necessary funds will come from the CDE, 22.5% from theRGR, 18.0% from the State Government and the remaining 33.0% from CEMIG. Forfurther discussion of the Light for All program, see “Item 4. Information onthe Company—Distribution and Purchase of Electric Power—Expansion ofDistribution Capacity.”

 

An important project that CEMIG invests in is theMinas PCH Program. This project aims to build dozens of Small HydroelectricPower Plants in the State of Minas Gerais, and will guarantee a diversified andhigher energy supply for the growth of the regional economy.  In 2008, the first plant made possible by theprogram, PCH Cachoeirão, came into operation which has an installed capacity of27 MW. In August 2010, PCH Pipoca, which has an installed capacity of 20MW, is expected to begin operation. In addition, on July 18, 2007, fourother hydroelectric plants with installed capacity of 44 MW were approved bythe Board of Directors of CEMIG to commence works but they are currentlyawaiting financing from BNDES and the signing of both the energy sale contractsand the Engineering and Procurement Contract.

 

83

----

Table of Contents

 

Another highlight in new investment in distribution isthe *Cresce Minas* program. Thisprogram ran from 2006 to December 2011 and provided infrastructure andimprovements to the electricity distribution system throughout Minas Gerais toimprove the quality of electricity supply and adapt it to the new conditions ofthe market.

 

In relation to the energy supply, under normal climateconditions, we expect the current capacity and favorable reservoir levels toprevail in the following years. . Although there was a reduction in the growthrate of the electricity market during the years 2008 and 2009, due to the worldfinancial crisis, the present installed capacity and the capacity projected forthe next  years are expected to fully satisfy the projected levels ofconsumption.  Also, the government hasbeen successful in the auctions it has held for major hydroelectric projects,such as the Jirau and Santo Antônio plants on the Madeira river, and the BeloMonte plant on the Xingu river.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

**Contractual Obligations**

 

We have outstanding contractual obligations andcommitments which include principal debt payment provisions, the obligation topurchase electricity for resale from Itaipu, the obligation to transfer andtransport electric power from Itaipu as well as construction commitments. Thefollowing table provides information, as of December 31, 2009, about ourcontractual obligations and commitments in millions of *reais*.

 
| ** **                                            | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012**  | ** ** | **2013**  | ** ** | **2014**  | ** ** | **2015**  | ** ** | **2016  and  beyond** | ** ** | **Total**   | ** ** |
|-------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------------------|------------|-------------|------------|
| Long-Term debt (1)                                    |       | 3,913     |       | 1,119     |       | 1,273     |       | 1,109     |       | 908       |       | 424       |       | 531                   |       | 9,277       |       |
| Derivative financial  instruments (“swaps”) |       | 51        |       | 11        |       | 11        |       | 5         |       | —    |       | —    |       | —                |       | 78          |       |
| Purchase of Electricity  from Itaipu (2)              |       | 899       |       | 842       |       | 863       |       | 897       |       | 925       |       | 722       |       | 18,761                |       | 23,909      |       |
| Transportation of  Electric Power from Itaipu (2)     |       | 67        |       | 70        |       | 71        |       | 74        |       | 54        |       | 47        |       | 2,148                 |       | 2,531       |       |
| Pension Plan Debt—Forluz                         |       | 82        |       | 70        |       | 66        |       | 43        |       | 46        |       | 48        |       | 549                   |       | 904         |       |
| “Luz para todos” (Light for All) Program    |       | 499       |       | —    |       | —    |       | —    |       | —    |       | —    |       | —                |       | 499         |       |
| Regulatory Investments                                |       | 631       |       | 631       |       | 631       |       | 157       |       | —    |       | —    |       | —                |       | 2,050       |       |
| Electricity Power  Purchase (3)                       |       | 2,525     |       | 3,003     |       | 3,969     |       | 4,605     |       | 4,318     |       | 4,181     |       | 112,344               |       | 134,945     |       |
| Total                                                 | ** ** | **8,667** | ** ** | **5,746** | ** ** | **6,884** | ** ** | **6,890** | ** ** | **6,251** | ** ** | **5,422** | ** ** | **134,333**           | ** ** | **172,143** | ** ** |

 

----

(1)   In the event of our non-compliance withcertain covenants in our loan agreements, the total principal, future interestand any penalties due under these agreements may become immediately due andpayable.  See Item 13. “Defaults,Dividend Arrearages and Deliquencies.” These amounts do not include interest payments on debt or payments underinterest rate swap agreements.  TheCompany expects to pay approximately R$590 million in interest payments on debtin 2010. The Company does not believe projections of interest payments andpayments under interest rate swap agreements would be meaningful. Through June 2010the Company has already made R$2,853 million of debt payments.

 

(2)   Contract with Furnas, denominated in U.S.dollars, to supply electric power purchased from Itaipu until May 2013.Amounts are calculated based on the U.S. dollar exchange rate as of December 31,2009.

 

(3)   It includes spot market, purchasesthrough auctions and bilateral agreements.

 

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

 

**Directors and Senior Management**

 

CEMIG is managed by our Board of Directors, which has14 members, each with his or her respective substitute member, and by ourExecutive Board, which consists of nine Chief Officers. Since it is themajority stockholder, the government of the State of Minas Gerais has the rightto elect the majority of our Board of Directors and can thus control thedecisions of the Board’s meetings. Every holder of CEMIG common shares has theright to vote in an election for members of our Board of Directors. Under theBrazilian Corporate Law, any stockholder holding at least 5% of our commonshares in circulation may request the adoption of a multiple vote procedure,which confers upon each share a number of votes equal to the present number ofmembers of our Board of Directors and gives the stockholder the right toaccumulate his or her votes in one sole candidate, or distribute them amongseveral.

 

84

----

Table of Contents

 

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

 

CEMIG and its wholly-owned subsidiaries CemigGeneration and Transmission and Cemig Distribution all have the same Board ofDirectors, Fiscal Council and Executive Board, except that, in relation to thewholly-owned subsidiaries’ Executive Board, only Cemig Distribution has a ChiefDistribution Sales Officer, and only Cemig Generation and Transmission has aChief Generation and Transmission Officer.

 

**Board of Directors**

 

Our Board of Directors normally meets once every twomonths. Its responsibilities include setting the corporate strategy, generalorientation of our businesses and election, dismissal and monitoring of ourChief Officers.

 

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

 

The members of our Board of Directors are elected fora period of three years, and may be re-elected. The complete body of members iselected every three years. Our Board of Directors is made up of 14 members, ofwhom eight are elected by the government of the State of Minas Gerais, five bySouthern Electric Brasil Participações Ltda. (“Southern”), and one by theholders of preferred shares. The periods of office of the present members ofour Board of Directors expire in April 2012. The names, positions anddates of original appointment of our present board members and their respectivesubstitute members are as follows:

 
| **Name**                                      | ** ** | **Position**      | ** ** | **Date of  original   appointment** |
|-----------------------------------------------|------------|-------------------|------------|-------------------------------------|
| Sérgio Alair Barroso                     |       | Chairman          |       | March 5, 2009                  |
| Paulo Sérgio Machado Ribeiro             |       | Substitute Member |       | April 25, 2008                 |
| Djalma Bastos de Morais                       |       | Vice-Chairman     |       | January 14, 1999               |
| Lauro Sérgio Vasconcelos David           |       | Substitute Member |       | April 28, 2006                 |
| Arcângelo Eustáquio Torres Queiroz  |       | Board Member      |       | December 10, 2009              |
| Franklin Moreira Gonçalves               |       | Substitute Member |       | February 27, 2003              |
| Antônio Adriano Silva                    |       | Board Member      |       | January 14, 1999               |
| Marco Antonio Rodrigues da  Cunha             |       | Substitute Member |       | February 27, 2003              |
| Aécio Ferreira da Cunha                  |       | Board Member      |       | April 29, 2010                 |
| Adriano Magalhães Chaves                 |       | Substitute Member |       | December 10, 2009              |
| Francelino Pereira dos Santos                 |       | Board Member      |       | February 27, 2003              |
| Luiz Antônio Athayde Vasconcelos         |       | Substitute Member |       | February 27, 2003              |
| Maria Estela Kubitschek Lopes                 |       | Board Member      |       | February 27, 2003              |
| Fernando Henrique Schüffner Neto         |       | Substitute Member |       | June 22, 2007                  |
| João Camilo Penna                        |       | Board Member      |       | April 25, 2008                 |
| Guilherme Horta Gonçalves Junior         |       | Substitute Member |       | February 27, 2003              |
| Britaldo Pedrosa Soares (1)                   |       | Board Member      |       | April 25, 2008                 |
| Jeffery Atwood Safford (1)                    |       | Substitute Member |       | April 25, 2008                 |
| Evandro Veiga Negrão de Lima  (1)        |       | Board Member      |       | April 28, 2006                 |
| Maria Amália Delfim de Melo  Coutrim (1) |       | Substitute Member |       | April 25, 2008                 |
| Roberto Pinto Ferreira  Mameri Abdenur (1)    |       | Board Member      |       | April 25, 2008                 |
| Clarissa Della Nina Sadock  Accorsi (1)       |       | Substitute Member |       | December 10, 2009              |
| André Araújo Filho (1)              |       | Board Member      |       | April 25, 2008                 |
| Andréa Leandro Silva (1)                 |       | Substitute Member |       | May 7, 2004                    |
| Thomas Anthony Tribone (1)                    |       | Board Member      |       | July 24, 2008                  |
| José Castelo Branco da Cruz  (1)         |       | Substitute Member |       | April 25, 2008                 |
| Guy Maria Villela Paschoal (2)                |       | Board Member      |       | April 25, 2008                 |
| Cezar Manoel de Medeiros (2)                  |       | Substitute Member |       | April 29, 2009                 |

 

----

(1)     Elected by Southern.

(2)     Elected by the preferred shareholders.

 

85

----

Table of Contents

 

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

 

*Aécio Ferreira da Cunha -* Mr. da Cunha serves on the Board ofDirectors of the state-controlled generation company, Furnas, which he joinedin 1993. He was Chairman of the BNDES in 1993, an elected state congressmanfrom 1955 to 1962, a federal congressman for eight terms (1963-1987), andCabinet Secretary at the Minas Gerais Department of Trade and Industry.Although he was appointed to the Federal Audit Board in 1988, he decided not toaccept the post. He has a law degree from the Universidade do Brasil of Rio deJaneiro (1951), and a diploma from the Escola Superior de Guerra (1973). He wasa member of CEMIG’s Board of Directors from 2003 to 2008. He currently hasfarming interests in the North of Minas Gerais.

 

*André Araújo Filho —*Mr. Araújo received a law degreefrom Mackenzie Law Faculty in 1968, with postgraduation in labor law from theGetúlio Vargas Foundation. He studied in the Global Leadership course at theInternational Strategic Studies Center at Georgetown University, Washington DC,and has published 3 books: A Escola do Rio — Fundamentos Políticos da NovaEconomia Brasileira, published by Editora Alfa Omega, in 1998; MercadosSoberanos — Globalização, Poder e Nação, published by Editora Alfa Omega, in1999; and Moeda e Prosperidade — O Impasse do Crescimento na Política deEstabilização, published by Editora Top Books, in 2005. He was TreasuryDirector of The Brazilian Household Appliances Industry Association, Abinee,for three terms of office, from 1974 to 1983, and First Treasurer of theNational Household Appliances Manufacturers’ Association, Sinaees, from 1974 to1985, also for three terms of office. He was Chairman ofEmplasa, Empresa de Planejamento Metropolitano da Grande São Paulo S.A., in1994; Financial Director of Prodam — Companhia de Processamento de Dados doMunicípio de São Paulo, in 2000; and from 1972 to 1983 he was FinancialDirector and CEO of Búfalo Motores S.A.

 

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

 

*Arcângelo Eustáquio Torres Queiroz -*Mr. Queirozhas been with CEMIG since 1988, and is a Visual Communication Specialist andTechnical Administrator. He is currently Director of Sindieletro — the MinasGerais Electricity Industry Workers’ Union; a member of CEMIG’s IntegratedHealth Administration Committee, Prosaúde, and a member of CEMIG’s Careers andRemuneration Committee. He graduated with a degree in history from UNIBHUniversity, Minas Gerais in 1992.

 

*Britaldo Pedrosa Soares -*Mr. Soares earned his degree inmetallurgical engineering from Minas Gerais Federal University, withpostgraduate studies in engineering economics from the Dom Cabral Foundation,and an extension course in management and leadership from Darden School ofBusiness of the University of Virginia. He began his career withCitibank/Citigroup in 1980, where he was Corporate Bank and InternationalCorporate Finance Vice-President from 1988 to 1992. From 1992 to 1998 he wasFinancial Director of the pulp area of the Caemi/Jari Companies, and CEO ofJari Celulose. He was Vice-President for Finance of Enron South America, andPrisma Energy, the holding company of the electricity distributor Elektro, fromFebruary 1999 to August 2005. At Elektro he was Finance and InvestorRelations Manager from February 1999 to December 2003. InSeptember 2005 he became Vice-President for Finance and Investor Relationsof the companies of the AES Group in Brazil (Eletropaulo, AES Tietê, AESUruguaiana, AES Sul and others). Since July 2007 he has been CEO of theAES Group of companies in Brazil.

 

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

 

*Evandro Veiga Negrão de Lima -*Mr. Negrão de Lima graduated with adegree in medicine with a specialization in psychiatry from the Minas GeraisFederal University in 1964, where, after hospital and university experience inColorado, USA, he later became a lecturer and subsequently Monitor in ForensicMedicine. He was a clinical psychiatrist for the private social securityinstitute of the employees of Minas Gerais state, retiring as head of medicalservices for the interior of the state. He has been Director of the MinasGerais Commercial Association, Vice-president of the Real Estate CompanyManagers’ Club, Vice-President of América Football Club, director of the twosteel trading companies, Cobraço and Cobrafer, and a licensed aircraft pilotsince 1968. He is

 

86

----

Table of Contents

 

currently chairman of the planning and engineeringcompany Sancruza, president of the Pampulha yacht club in Belo Horizonte, andchairman of the construction and development company, NL, and two real estatemanagement companies.

 

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

 

*Guy Maria Villela Paschoal -*Mr. Villela Paschoal is a Brazilianengineer, and has a degree in mechanical and electrical engineering from theFederal University of Minas Gerais (UFMG). He worked at CEMIG for 28 years,where he served as Chairman of the Board.

 

*João Camilo Penna -*Mr. Penna earned his degree inengineering in 1948 from Minas Gerais Federal University (UFMG). He was a worksengineer with CVRD from January 1949 to April 1951; Planning andWorks Officer at CEMIG from May 1951 to March 1961; and TechnicalDirector of CEMIG from March 1961 to March 1967. He was Chairman ofCEMIG from March 1967 to March 1975. He served as Finance Secretaryof Minas Gerais State in the governments of Aureliano Chaves and Oznam Coelhofrom March 1975 to March 1979, as Brazil’s Trade and IndustryMinister in the Figueiredo government from March 1979 to August 1984,and was Chairman of Furnas Centrais Elétricas from May 1985 toAugust 1989. During these same periods he was interim AdministrationSecretary of Minas Gerais State, a Member of the National Monetary Council(CMN), member of the Board of Directors of Eletrobras, Vice-Chairman of theBrazilian Technical Standards Association, Director of the Large DamsCommittee, and of the Brazilian Group for the World Energy Conference. From1990 he was a consultant and member of boards of organizations such asMannesmann, the Dom Cabral Foundation, Copersucar, Companhia Siderúrgica doPará, Companhia Força e Luz Cataguazes Leopoldina, Biobrás, Copasa, and theMinas Gerais Industries’ Federation (Fiemg). From 1984 to 1992 he was a memberof the Board of Directors of Itaipu Binacional, and Chairman of the Board ofthe Horizontes Institute at Atech—Sivam. At Coopers and Lybrand, he waspresident of the Supervision Committee of the Brazilian IndustryCompetitiveness Study. In 2002 he was Consultant in the preparation of thestudy “Minas Gerais in the 21st Century,” an initiative of the Minas GeraisDevelopment Bank (BDMG); and President of the organization “Economy and Energy— E&E.” He was a member of the President of the Republic’s EthicsCommittee, from September 2000 to March 2005, and fromApril 2004 to April 2005 was a member of the Public Ethics Committeeof the Minas Gerais State Government.

 

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

 

*Roberto Pinto Ferreira MameriAbdenur -*Mr. Abdenurhas a law degree from the PUC University of Rio de Janeiro and a degree ineconomics from the London School of Economics. From 1964 to 1983 he was in theDiplomatic Service, as Third, Second, and First Secretary, Counselor, Ministerand Ambassador. At the Foreign Relations Ministry, he worked in theCommunications and Archives Division from 1964 to 1965, the Commercial PolicyDivision from 1966 to 1967, as Interim Head of the Technical Analysis andPlanning Sector in 1968, Official of the Minister’s Office in 1969, Assistantto the Secretary-General from 1975 to 1978, Coordinator for Economic and TradeAffairs to the Office of the Foreign Relations Minister from 1979 to 1984 andSecretary General for Foreign relations from 1993 to 1995. He has beenAssistant Consul-General in London from 1969 to 1973, First Secretary in theBrazilian Embassy in Washington from 1973 to 1975; and was Brazilian Ambassadorto Ecuador from 1985 to 1988, to China from 1989 to 1993, to Germany from 1995to 2002, to Austria from 2002 to 2004, and to the USA from 2004 to 2007. Since2007 he has acted as consultant on international political and economicsubjects related to Brazil.

 

*Sergio Alair Barroso -*Mr. Barroso has a degree ineconomics from São Lucas University (São Paulo); a master’s degree ininternational economics from the University of Boston (USA); andspecializations in business administration at the University of Michigan (USA),and in management of executives from Columbia University (USA) and the GetúlioVargas Foundation (São Paulo).

 

87

----

Table of Contents

 

Heis a former chairman of the Board of Directors of Fosfertil, Ultrafertil andFertifos. He is currently the Economic Development Secretary of the State ofMinas Gerais, and Chairman of the Board of Directors of CEMIG.

 

*Thomas Anthony Tribone —*Mr. Tribone**is the founder and currently CEO of the Guggenheim GlobalInfrastructure Company. As former President of AES Americas Corporation, he hasextensive experience in operations and transactions in the global electricityand infrastructure sectors. He has also been a member of the management ofAtlantic Richfield Company. As a recognized leader in the energy industry, hehas testified before the US Congress on energy matters and his ideas have beenwritten about in books and articles in the US and other countries. Mr. Triboneis a US citizen, with domicile in the US, and registered in Brazil. He has adegree in chemical engineering from Case Western Reserve University, and an MBAdegree and a law degree from Duquesne University*.*

 

**Board of Executive Officers**

 

OurExecutive Board is responsible for putting into effect the decisions of ourBoard of Directors and for day-to-day management. The Members of the ExecutiveBoard, the Chief Officers, have individual responsibilities established in theby-laws and hold their positions for a period of office of three years. Theperiod of office of the present Chief Officers expires in April 2012. TheChief Officers are elected by our Board of Directors. Usually, ordinarymeetings are held at least twice per month, with extraordinary meetings heldwhenever called by the Chief Executive Officer, or CEO, or by two ChiefOfficers other than the CEO.

 

Thenames, positions and dates of initial appointment of our executive officers areas follows:

 
| **Name**                                  | ** ** | **Position**                                                                | ** ** | **Date of original  appointment** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------|
| ** **                                | ** ** | ** **                                                                  | ** ** | ** **                        |
| Djalma  Bastos de Morais                  |       | Chief Executive Officer  (CEO)                                              |       | January 14,  1999            |
| Arlindo  Porto Neto                       |       | Deputy  CEO                                                                 |       | January 20,  2009            |
| José  Carlos de Mattos               |       | Chief  New Business Development Officer                                     |       | January 9,  2007             |
| Luiz Henrique de Castro Carvalho          |       | Chief  Generation and Transmission Officer                                  |       | August 18,  2008             |
| Fernando  Henrique Schüffner Neto    |       | Chief  Distribution and Sales Officer                                       |       | August 18,  2008             |
| Luiz  Fernando Rolla                      |       | Chief  Officer for Finance, Investor Relations and Control of Holdings |       | January 9,  2007             |
| Marco Antonio Rodrigues da Cunha          |       | Chief  Corporate Management Officer                                         |       | January 9,  2007             |
| Bernardo Afonso Salomão de Alvarenga |       | Chief  Trading Officer                                                      |       | April 27,  2007              |
| Márcio  Augusto Vasconcelos Nunes    |       | Chief  Officer for the Gas Division                                         |       | September 24,  2009          |

 

Below is brief biographical information about eachmember of the Executive Board.

* *

*Arlindo Porto Neto -* Mr. Porto Neto has adegree in business administration and accounting from the Federal University ofUberlândia. Since 2004 he has been Vice-President of the Minas GeraisDevelopment Company (Codemig). He served as Senator for the State of MinasGerais from 1995 to 2003, and was Brazil’s Minister of Agriculture and Supplyfrom 1996 to 1998. From 1991 to 1994 he was Deputy Governor of the State ofMinas Gerais. From 1983 to 1988 he was Mayor of Patos de Minas.

 

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

 

*Djalma Bastos de Morais -* For biographicalinformation regarding Mr. Morais, see “— Board of Directors.”

 

*Fernando Henrique Schuffner Neto -* Mr. Schuffner earned adegree in electrical engineering from PUC University of Minas Gerais in 1982, amaster’s degree from Unicamp in 1984, and an MBA from Ibmec in 2000. After workingin university research, he joined CEMIG in 1985, working as a regional managerand administrator before becoming Superintendent for Coordination of Planningand Management, successively, for Distribution, Distribution Expansion, andDistribution Market Expansion. He then became CEMIG’s Executive CoordinationSuperintendent of the Light for All Program. He has lectured at universities,and has

 

88

----

Table of Contents

 

publishedmany scientific articles from 1983 to 2005, ranging from work on topologies ofcommutating circuits (1983) to joint authorship of Fuzzy Preference Relationsand Multiobjective Decision Making — presented to the Fourth IEEE InternationalWorkshop on Soft Computing as Transdisciplinary Science and Technology, inMuroran, Japan, in May 2005. His work was presented to internationalcongresses including control of induction motors. He has taken courses includingthe Amana Key APG management course in Sao Paulo in 2004. He was appointedChief Energy Generation and Transmission Officer of CEMIG in January 2007.

 

*José Carlos de Mattos -*  Mr. Mattos received a degree inliterature from Uni-BH (Belo Horizonte Central University) in 1972. He iscurrently the Chief Executive Officer of Gasmig. From 2004 to 2007 he wasDirector-President of Previminas, the Minas Gerais Social Security Foundation.In 2003 and 2004 he was the financial director of Codemig, the Minas GeraisDevelopment Company. From 1983 to 1992 he was Regional Superintendent of theFederal Savings Bank (Caixa Econômica Federal) in the states of São Paulo, Riode Janeiro and Minas Gerais, and was also Financial Director of the FederalSavings Bank from 1992 to 1994. From 1992 to 1994 he was also the Director ofBIAPE — the Inter-American Savings and Loan Bank. From 1995 to 1996, he wasVice-President of Bemge — the State Bank of Minas Gerais. He was appointedChief Planning, Projects and Construction Officer of CEMIG in January 2007.

 

*Luiz Fernando Rolla -* Mr. Rolla joined CEMIGin 1974. Mr. Rolla earned a degree in electrical engineering from theFederal University of Minas Gerais in 1974 and obtained several specializationcourses. He became CEMIG’s Investor Relations Manager in 1986, and wasappointed Chief Financial and Investor Relations Officer in January 2007.As CEMIG’s Investor Relations Manager, Mr. Rolla was responsible for theformulation and implementation of CEMIG’s investor relations strategy beginningin 1986, including the structuring of the Level I and II ADR programs in 1993and 2001, share sale transactions, prospectuses, investor presentations,roadshows, CVM registrations, detailed corporate governance matters,stockholders’ meetings, shareholder services, the Annual Report, our website,earnings releases and conference calls, market analyst meetings, andpresentations at many of the most important emerging markets conferences in thelast 15 years. In his 32 years with the company he has also been involved inother responsibilities including coordination of long-term planning, structuredcompany-wide budget control and cost analysis, project finance transactions,and negotiation of important debt rollover contracts and issues. Recognition ofMr. Rolla’s wide experience and present outstanding status in Brazilianinvestor relations includes Apimec’s “Best IR Professional” in 1999 and 2005; “BestBrazilian IRO” from IR Magazine in 2006; Honorable Mention in IR Magazine’s “BestLatin American IRO” in 2004, naming of CEMIG as “Best Listed Company” by Apimecin 2006; recognition by Abrasca for “Best Annual Report” in 2005; and “BestPresentation of 2006” by the Apimec organizations of both São Paulo and RioGrande do Sul.

 

*Luiz Henrique de Castro Carvalho -* Mr. Carvalho is CEMIG’s Chief Generation and Transmission Officer.He earned a degree in electrical engineering from Minas Gerais FederalUniversity (UFMG) in July 1982, and a postgraduate degree in systemsanalysis, with specialization in mainframe support, from that university in July 1983.In February 2000 he also concluded an international executive MBA inbusiness administration and information technology management from the GetúlioVargas Foundation. His first professional experience was in the Research andDevelopment Centre (CPQD) of Telebrás, as an electrical engineer, from October 1983to March 1984. He began his career at CEMIG as a supportanalyst in the Software and Support Group in March 1984, and since thenhas been Joint Leader, Group Leader and Manager in the Personal IT TerminalUsers Support Division, Assistant in the IT Support Department, Superintendentof Telecommunications and IT, Superintendent for Material, Logistics andServices, Superintendent of Material and Services, Advisor to the President ofGasmig, and Substitute Member of the Board of Directors of CEMIG. In addition to his responsibilities at CEMIG, he is a Director of Horizontes Energia S.A.,a member of the board of directors of Central Termelétrica De Cogeração S.A.,and a substitute member of the board of directors of CGET and CentralHidrelétrica Pai Joaquim S.A. He has also been Administrative Director of CEMIG Employees’ Investment Club, from April 1999to April 2003, Social Action Director in the Minas Gerais IT andTelecommunications Users’ Association (Sucesu/MG) from 2000 to 2002, and CEO ofthe CEMIGInter-Management Association from July 2005 to July 2007.

 

*Márcio Augusto VasconcelosNunes —* Mr. Nunes has a degreein civil engineering from PUC University (Pontifícia Universidade Católica) ofRio de Janeiro. After working at Light and Eletrobras, he was CEO ofCERJ (Cia. de Eletricidade do Rio de Janeiro) — in 1987 and 1988; a member ofthe Executive Board of Furnas from 2001 to 2003; and CEO of Copasa, from 2005to 2009. He has also been Chairman of the board of directors of Copasa,Vice-Chairman of the board of directors of CERJ, a member of the Audit Board ofFurnas, and a member of the board of directors of Cia. de Gás do Rio deJaneiro. He was appointed Chief Officer for the Gas Division of CEMIG and CEOof Gasmig in September 2009.

 

*Marco Antonio Rodrigues da Cunha -* Mr. Rodrigues da Cunhaobtained a degree in civil engineering from Minas Gerais Federal University in1978, with later specialization in structures and transportation, and inengineering valuation, accounting, and economics. He has subsequently gainednumerous qualifications in quality management, finance, accounting and relatedsubjects. Among university lecturing activities, has given a course in Creationof Companies and Business, at Una University, since 2001. He joined BDMG (theMinas Gerais State Development Bank) in 1978, working in assessment of publicprojects, including major infrastructure development projects. He served asPresident of the Employees’ Association from 1998 to 1990, and Manager of theFinancial Division from 1988 to 1991. From 1988 to 1990 he was also Presidentof the National Association of Official Banks’ Representative Associations.From 1991 to 1995 he was chairman of Minas Gerais Silos and Warehouses Company,the public-sector

 

89

----

Table of Contents

 

companycoordinating the state’s farming infrastructure facilities, and from 1995 to1999 was Chairman of INDI — the Minas Gerais Development Institute — whichprovides support for numerous important industrial development projects in thestate of Minas Gerais. During this time he negotiated international missions toSpain, France, Belgium, Holland, Canada, Argentina, Korea, Japan, and the USAto promote cooperation with Minas Gerais industry. He returned to the BDMG in1999 to handle development planning, coordinating the state’s economic andsocial development budgeting, and other important strategic studies. He wasappointed Chief Corporate Management Officer of CEMIG in January 2007.

 

**Compensation of Directors and Executive Officers**

 

Forthe year ended December 31, 2009, the aggregate amount of compensation,including pension and other retirement benefits, authorized to be paid to alldirectors and executive officers was R$7 million, in accordance with theOrdinary General Meeting of Stockholders held on April 29, 2009.

 

Thereis no contract between the Company or its wholly-owned subsidiaries,subsidiaries or affiliated companies and directors or board members of Cemigthat provides any post-employment benefits, other than the Forluz complementaryretirement plan applicable to the other employees, provided that the boardmember qualifies under the rules and regulations of Forluz.

 

**Fiscal Council**

 

Our Fiscal Council is required to meet onceevery quarter, but in practice it has been meeting once a month. Our FiscalCouncil consists of three to five members and their respective alternateselected by our shareholders at the annual meeting for a term of one fiscalyear. Holders of the preferred shares as a group are entitled to elect onemember of the Fiscal Council and a corresponding alternate. Minorityshareholders holding shares representing at least 10%, individually or in theaggregate, are entitled to elect one member of the Fiscal Council and acorresponding alternate. The primary responsibility of the Fiscal Council,which is independent from management and from the independent publicaccountants appointed by the Board of Directors, is to review our financialstatements and report on them to our shareholders. The Fiscal Council is alsoentitled to give opinions on any proposals from our management to be submittedto the shareholders’ meeting related to (i) changes in our share capital,(ii) issuances of debentures or rights offerings entitling the holder tosubscribe for equity (bonus de subscrição), (iii) investment plans andcapital expenditures budgets, (iv) distribution of dividends,(v) changes to our corporate form and (vi) corporate restructuringssuch as mergers, consolidations and spin-offs. The Fiscal Council also examinesthe activities of management and reports these activities to the shareholders.

 

The current members of the Fiscal Council, and their Substitutemembers, all of whose terms shall expire at the Ordinary General Meeting ofShareholders to be held in 2011, for the approval of the 2010 fiscal yearfinancial statements are as follows:

 
| **Name**                                            | ** ** | **Position**      | ** ** | **Date of initial  appointment** |
|-----------------------------------------------------|------------|-------------------|------------|----------------------------------|
| ** **                                          | ** ** | ** **        | ** ** | ** **                       |
| Aristóteles Luiz Menezes Vasconcellos Drummond |       | Member            |       | April 27,  1999             |
| Marcus Eolo de Lamounier Bicalho                    |       | Substitute Member |       | February 27,  2003          |
| Luiz  Guarita Neto                                  |       | Member            |       | February 27,  2003          |
| Ari  Barcelos da Silva                              |       | Substitute Member |       | April 29,  2005             |
| Thales de Souza Ramos Filho                         |       | Member            |       | February 27,  2003          |
| Aliomar  Silva Lima                                 |       | Substitute Member |       | February 27,  2003          |
| Luiz  Otávio Nunes West (1)                    |       | Member            |       | April 27,  1999             |
| Leonardo  Guimarães Pinto (1)                  |       | Substitute Member |       | April 26,  2007             |
| Vicente de Paulo Barros Pegoraro (2)                |       | Member            |       | April 29,  2009             |
| Newton  de Moura (2)                                |       | Substitute Member |       | April 29,  2009             |

 

----

(1) Elected by Southern.

(2) Elected by the holders of the preferred shares.

 

**Consumer Council**

 

Wehave established a Consumer Council pursuant to Brazilian law, which iscomprised of representatives of consumer groups and advocacy organizations, butnot members of our Board of Directors. The Consumer Council advises us as toservice and other concerns of our consumers.

 

90

----

Table of Contents

 

**Audit Committee**

 

OurFiscal Council acts as our audit committee for purposes of the Sarbanes-OxleyAct of 2002. Under Section 10A-3 of the SEC rules on Audit Committees oflisted companies, non-U.S. issuers are permitted not to have a separate AuditCommittee made up of independent members if there is a Fiscal Councilestablished and chosen in accordance with the legal rules of its origincountry, expressly requiring or allowing that such council follow certainobligations. Also in accordance with this exemption, a Fiscal Council mayexercise the obligations and responsibilities of an Audit Committee of theUnited States up to the limit permitted by Brazilian Law. The financialexperts of our Fiscal Council are Luiz Otávio Nunes West and Ari Barcelos daSilva.

 

**Employees**

 

As of December 31,2009, we had 9,746 employees, of which 248 were at management level, and we hadan average of 356 temporary employees. As of December 31, 2008, we had10,422 employees, of which 265 were at management level, and we had an averageof 353 temporary employees. As of December 31, 2007 we had 10,818employees, of which 236 were at the management level, and we had an average of225 temporary employees.  This tableshows the breakdown of our employees by type on those dates:

 
| ** **                                       | ** ** | **Number of Employees at** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **December 31, 2009**           | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| Managers                                         |       | 248                                       |       | 265 |   | 236 |   |
| Professional staff                               |       | 1,500                                     |       | 1,398 |   | 1,427 |   |
| Operational technical staff and office employees |       | 7,998                                     |       | 8,759 |   | 9,155 |   |
| Total                                            |       | 9,746                                     |       | 10,422 |   | 10,818 |   |

 

In2009, 2 employees were hired and 735 employees left the Company.

 

*Unions*

 

Oncea year we hold collective negotiation meetings with the unions that representour employees. The resulting contract remains in effect for the subsequent12-month period beginning on November 1. About 16 years ago, CEMIG ceasedto follow the previous market practice in Brazil of automatically adjustingsalaries based on inflation.

 

The Collective EmploymentAgreement signed between the Company and the unions, which is the result offree negotiation between the parties, in accordance with current legislation,is renewed annually and includes benefits, duties and rights that governemployment relations in the Company.

 

InNovember 2009, after broad discussion of all the terms and conditions withthe unions that represent our employees, we executed two collective agreements:(i) an annual agreement on salaries, benefits, duties and rights for theperiod from November 1, 2009 to October 31, 2010, which established asalary increase of 4.88% for all salaries; and (ii) a specific agreement,in effect from November 20, 2009 to March 31, 2011, referring to thedistribution of profits and results for 2009 and 2010, to be paid in 2010 andin 2011, respectively.

 

Inregards to 2009, the collective agreement established an extraordinarydistribution in the amount of twice the monthly remuneration of each employee.Regarding the profit sharing for 2010, the collective agreement established anextraordinary distribution in the amount of 0.7 remuneration of each employeein case of achievement of 50% of IGPRa.

 

IGPRais an indicator used to mark a portion of CEMIG’s employees’ income that ispaid in the form of profit sharing, as per the Specific Collective Agreement.It is based on the frequency rate of accidents with its own staff, the qualityof customer service and cost reduction.

 

InDecember 2008 we completed the annual collective salary agreement for November 1,2008 through October 31, 2009. It set an increase of 7.26% for allsalaries, effective November 1, 2008. It also established an extraordinarydistribution of funds under the profit sharing program in the amount of 4.67times the monthly salary of each employee, which was paid in December 2008.

 

Wehave not had any significant labor strikes in the last six years.  On November 13, 2009, 46% of theemployees participated in a 24-hour interruption of services during thecollective negotiations for 2009-10.

 

OnNovember 20, 2008, 10% of the employees took part in an interruption ofwork during the collective negotiations for 2008/2009. In 2007, there were fourinterruptions of work during the negotiations for 2007/2008, as follows: foreight hours on 

 

91

----

Table of Contents

 

October 24,2007; for eight hours on October 31, 2007; for eight hours on November 1,2007; and for eight hours on November 28, 2007.

 

Fewemployees took part in these interruptions, and they had no negative effect onthe company.

 

Wecannot foresee what effects, if any, future conflicts on labor law issues mayhave on our operational results or our financial situation.

 

*Remuneration*

 

In2003, the Careers and Remuneration Plan was approved. The goal of this plan isto provide us with the remuneration tools necessary to maintain an equitableand competitive pay structure and establish criteria for promotions. The planwas implemented in January 2004 for professional staff, and inMarch 2004 for the administrative and operational employees. An internalcommittee, with representatives of both CEMIG and the labor unions, was createdin connection with the plan.

 

Undera program referred to as the “Anuênio,” CEMIG provides its employees hired onor before October 31, 2005 with an annual 1% increase in monthly basesalary for each year of employment with CEMIG, up to a limit of 35 years. Basedon an agreement with our labor unions, on April 27, 2006, CEMIG offeredeach of its employees hired on or before October 31, 2005 an up-frontpayment in exchange for the relinquishment by the employee of his or her rightsto the Anuênio. Under the terms of this offer, CEMIG pays the employee anamount equal to (i) an estimate of the future amounts to be paid to theemployee under the Anuênio, but based on the number of years remaining for theemployee to complete his or her contributions to the National Social SecurityInstitute, or INSS, rather than the remaining years to reach up to the limit of35 years under the Anuênio, (ii) multiplied by a 12% discount rate and(iii) reduced by the application of a variable reduction factor stipulatedby the Company for each individual employee. The total amount paid to ouremployees as a result of this offer was approximately R$178 million.

 

Overthe last 4 years, we have been negotiating changes in our remuneration policieswith our labor unions, aiming to integrate the processes of management of humanresources to our business strategy as follows:

 

·             The 2005/2006 collective labor agreement institutedthe plan for an indemnity to replace future rights relating to the Anuênio,which 87% of our employees accepted; and established that employees hired on orafter November 1, 2005 will no longer be entitled to the Anuênio.

 

·             In 2007, the collective labor agreement with ourlabor unions established that employees hired on or after November 1, 2007will not be entitled to the 16.67% special bonus previously applied to theirbase salary.

 

·             The collective labor agreement signed in 2008 addedflexibility to the clause that previously guaranteed a minimum headcount of10,000 employees; now allowing this number to be as low as 9,000. It alsopermitted the Company to employ less than 9,000 people, provided that thisreduction arises from employee enrollment into the VoluntaryRetirement Program or the Voluntary Dismissal Program, dismissals(rescission of the employee contract) for just cause, rescissions of theemployment contract at the employee’s initiative or by joint agreement, andretirement.

 

*Profit Sharing Plan*

 

In1995, we established a profit-sharing program for employees in accordance withthe applicable Brazilian labor legislation. Under this program, we may notcontribute an amount to the employee profit sharing plan that is in excess of25% of the total dividends proposed for that year. In 2009, the payment of employees’ profit shares,including mandatory charges and payments based on payroll, totaled R$233 million and were paid in December. In 2008, thepayment of employees’ profit shares, including mandatory charges and paymentsbased on payroll, totaled R$362 million and were paid in December.

 

*Benefits*

 

Asof January 1, 2003, we implemented changes to our existing employee healthcare plans. The changes are a result of an agreement we entered into with ouremployees’ labor unions, most of which are represented by Sindieletro. Thechanges modified the contributions that we, our employees and our retirees areresponsible for and the types of benefits covered by each plan. As ofDecember 31, 2009, a total of R$128 million was paid in benefits toemployees, consisting of pension plan contributions and assistance benefits.

 

92

----

Table of Contents

 

*Voluntary**Retirement Program*

 

InMarch 2008, CEMIG implemented a Voluntary Retirement Program, which setsthe rules and conditions applicable to free and voluntary rescissions ofemployment contracts by employees, and also criteria applicable to specificsituations of employees who meet certain requirements for retirement. Employeeswho opt for the Voluntary Retirement Program receive a payment equal to threetimes their monthly salary and leave the Company a maximum of 90 days afteropting for the program. In 2009, 193 employees accepted the terms of ourVoluntary Retirement Program compared to 486 employees in 2008.

 

*VoluntaryDismissal Program*

 

InApril 2009, CEMIG implemented a Voluntary Dismissal Program, starting inApril 2009 and ending in June 2009, which sets rules andconditions applicable to free and voluntary termination of employment contractsby employees, and also establishes criteria applicable to employees who meetcertain retirement requirements. Employees who subscribe to the PDV receive a financial incentive varyingbetween four and sixteen times their monthly remuneration, according tocriteria established in the program’s regulations, of which the principal oneis the time of contribution remaining for full retirement entitlement under thenational social security system (“INSS”). The incentive includes payment of thecontributions to the pension fund and the INSS up to the date when the employeewould have complied with the requirements for applying for retirement benefitunder the INSS (limited to five years), and deposit of the obligatory “penalty”payment (applicable to dismissals) of 40% on the balance of the employee’saccumulated funds under the Unemployment Guarantee Fund or Fundo de Garantiapor Tempo de Serviço (FGTS)****system.

 

Additionally,CEMIG guarantees full payment of the costs of the group life insurance plan forsix months, and of the health plan for twelve months, from the date of leavingthe company.

 

A totalof 1,043 employees of the Company subscribed to the program. A provision forthe expenses for the financial incentives in the amount of R$206 was fullyrecognized in 2009.

 

*Programfor**Sharing**inProfit, Results, and Productivity*

 

CEMIGauthorized a distribution equal to 3% of its consolidated operational resultsfor the year ended December 31, 2009 under its Program for Sharing inProfit, Results, and Productivity, which was paid in March 2010.

 

*Health and Safety*

 

In2009 the number of work accidents that resulted in loss of one or more day’swork for the total of CEMIG’s own employees and outsourced workers was 7.14%higher than in 2008.  The main reason forthe increase was traffic accidents.

 

**Share Ownership**

 

Eachof our directors and executive officers beneficially owns less than 0.001% ofour preferred shares and less than 0.003% of our common shares.

 

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

 

**Principal Shareholders**

 

Asof December 31, 2009, the State Government owned, directly or indirectly,138,212,264 common shares, or 50.97% of our outstanding voting stock, and6,415,884 preferred shares, or approximately 1.84% of those outstanding. As ofthe same date, Southern, our second largest shareholder, owned 89,383,266common shares, or approximately 32.96% of those outstanding. Southern is ajoint venture formed in 1994. We believe that the principal participant inSouthern is Cayman Energy Traders, a subsidiary of Mirant Corporation (formerlySouthern Energy Inc.), a large United States-based power company. We believethat the other significant member of Southern is, as of December 31, 2009,AES Corporation, a global power company based in Arlington, Virginia that isengaged in the energy generation, distribution and retail supply businesses. Webelieve that the Opportunity Fund, a Brazilian investment fund, has a minorityinterest in Southern through 524 Participações S.A. Our principal shareholdersdo not have different voting rights with respect to the shares they own.

 

Thefollowing table sets forth certain information regarding the ownership of ouroutstanding common shares and preferred shares at December 31, 2009.

 

93

----

Table of Contents

 
| **Shareholder**                                 | ** ** | **Common  Shares** | ** ** | **%  of Class** | ** ** | **Preferred  Shares** | ** ** | **%  of Class** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------------|------------|----------------------|------------|
| State Government (1)                            |       | 138,212,264        |       | 50.97                | %          | 6,415,884             |       | 1.84                 | %          |
| Southern                                        |       | 89,383,266         |       | 32.96                | %          | —                |       | —               |       |
| All directors and executive officers as a group |       | 7,911              |       | —               |       | 874                   |       | —               |       |
| Other                                           |       | 43,558,713         |       | 16.06                | %          | 342,541,418           |       | 98.02                | %          |
| Total of outstanding shares                     |       | 271,154,243        |       | 100                  | %          | 342,541,418           |       | 98.02                | %          |
| Treasury shares                                 |       |               |       | —               |       | 264,473               |       | 0.08                 | %          |
| Total of authorized and issued shares           |       | 271,154,243        |       | 100                  | %          | 349,222,649           |       | 100                  | %          |

 

----

(1)                                  The shares inthis line item attributed to the State Government include shares held by MGI,other State Government agencies and state-controlled companies.

 

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

 

Asof December 31, 2009, we had 36 common shareholders of record in theUnited States, holding a total of 8,053,258 common shares. We also had 273preferred shareholders of record in the United States, holding a total of184,892,492 preferred shares. These numbers do not include the 123,812,242preferred shares and 1,085,343 common shares converted into ADRs.

 

Basedon publicly available filings with the SEC, we are aware of the followingchanges in ownership of our outstanding preferred shares.  OnFebruary 8, 2008, Capital Research and Management Company owned 13,644,250preferred shares of CEMIG, corresponding to 4.98% of our preferred shares and,as a result of buying transactions on February 8, 2008, now owns a totalof 13,990,050 preferred shares of CEMIG, corresponding to 5.11% of ourpreferred shares. Although our by-laws do not provide any restrictionsconcerning a change in our control, a state law authorizing a change of controlwould be required for a change of control to take place. Because we are astate-controlled company, the sale of more than 50% of the voting stock ofCEMIG by the State Government (or any other transaction that may transfer thecontrol of the company, either totally or partially) requires the passage ofspecific authorizing legislation by the legislature of Minas Gerais, approvedby at least 60% of the members of the State Assembly. The aforementionedauthorization must also be approved by local citizens in a referendum.

 

OnDecember 17, 2009, BlackRock, Inc., as investment manager on behalfof some of its clients, notified that as a result of the merger betweenBlackRock and Barclays Global Investors, on December 1, 2009, it hasachieved the total of 12,410,905 preferred shares and 20,411,225 AmericanDepositary Receipts (“ADRs”) for preferred shares, representing a total ofapproximately 9.39% of the total preferred shares in CEMIG. Blackrock Inc. hasnotified that the objective of the above-mentioned stockholdings is strictlyfor investment purposes, and it has no intention of altering the stockholdingcontrol or management structure of the Company. In addition, it has alsonotified that it holds no debentures issued by CEMIG that are convertible intoshares, and that no agreements have been entered into by BlackRock thatregulate the exercise of the right to vote or the purchase or sale ofsecurities issued by CEMIG.

 

OnApril 15, 2010, Lazard Asset Management LLC notified it has acquired17,497,213 shares, or 5.01% of the total of the shares issued by CEMIG. It hasalso notified that the acquisition of the above interest is not a case ofacquisition of control of the Company, but of investment, and that it does notseek to change CEMIG’s management, nor the composition of its stockholdingcontrol or functioning

 

OnJune 17, 2010, AGC Energia S.A. (“AGC Energia”), a subsidiary of AndradeGutierrez Concessões S.A. (“AGC”) notified that a share transfer occurredpursuant to a share purchase and sale agreement signed between Southern and AGCEnergia, with AGC as the consenting party, dated November 12, 2009. AGCEnergia acquired from Southern 98,321,592 common shares of CEMIG, representing32.96% of the voting stock and 14.41% of the total capital. AGC Energiaemphasizes that such transaction does not change the structure of thestockholding control, nor the management structure, of CEMIG.

 

Weare not aware of any other significant changes in the percentage ownership ofany shareholders that held 5% or more of our outstanding voting shares duringthe past three years.

 

**Related Party Transactions**

 

Weare party to the following related-party transactions:

 

94

----

Table of Contents

 

·                  Our agreementwith the State Government with respect to the CRC Account and related financialincome and provision for loss and VAT advance payments, expenses, assets andliabilities;

 

·                  Our agreementwith Forluz, the entity responsible for managing our employee pension fund,pertaining to the fund and related balances; and

 

·                  Our agreementwith COPASA, a Minas Gerais state-controlled company, related to accountsreceivable from energy sales.

 

Fora more detailed discussion of these and other related party transactions, seeNotes 3, 7, 8, 13, 14, 16, 19 and 22 to our consolidated financial statements.

 

On 2009, we also executed Power PurchaseAgreements with our subsidiaries Hidrelétrica Pipoca S.A., Santo AntônioEnergia S.A. and Usina Termelétrica Barreiro S.A. which were formally approvedby ANEEL:

 

·                   *Hidrelétrica Pipoca S.A*.: Cemig Generation and Transmission executed two Power PurchaseAgreements with Hidrelétrica Pipoca S.A. regarding energy supply for theperiods of July 1, 2010 to June 30, 2015, as authorized by ANEEL’sDispatch No. 4.061, from October, 30, 2009, and from July 1, 2015 to June 30,2020, as approved by ANEEL ́s Dispatch No. 4.456, of November 30,2009.

 

·                   *Santo Antônio Energia S.A.:*Cemig Generation and Transmission executed two Power Purchase Agreementswith Santo Antônio Energia S.A. regarding energy supply for the periods of May 1,2012, to December 31, 2027 authorized by ANEEL’s Dispatch No. 1.851, datedas of May 20, 2009 and a short-term energy supply agreement as approved byANEEL’s Dispatch No. 1.850 of May 20, 2009.

 

·                   *Usina Termelétrica Barreiro S.A:*Cemig Generation and Transmission executed a Power Purchase Agreementwith Usina Termelétrica Barreiro S.A. regarding short-term energy supply, asapproved by ANEEL’s Dispatch No. 1.851, dated as of May 20, 2009.

 

**Item 8.****          ****FinancialInformation**

 

**Consolidated Financial Statements and Other FinancialInformation**

 

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

 

**Legal Proceedings**

 

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

 

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

 

Formore information regarding such contingencies, see Notes 17 and 27 to ourconsolidated financial statements.

 

*Rate Increases*

 

Weare the defendant in several lawsuits brought by industrial consumers allegingthat increases in electricity rates, determined by DNAEE, predecessor of ANEEL,during a price freeze imposed by the Federal Government from March throughNovember 1986, known as the Cruzado Plan (*PlanoCruzado*) were illegal. Some of the plaintiffs further allege thatall our rates after the Cruzado Plan period were illegal, in part because theyincluded the Cruzado Plan period increases in the amounts that served as thebasis for calculating the further increases. Some of these claims have beendecided at the trial court level in our favor, whereas others have been decidedin favor of our consumers. All of the cases that have been decided at the trialcourt level have been appealed to the Superior Court of Justice**(*Superior Tribunal deJustiça*), which ruled, in most of the cases, that the plaintiffswere entitled only to

 

95

----

Table of Contents

 

reimbursementfor rate increases introduced during the Cruzado Plan. We are activelycontesting all of the aforementioned rate increase claims. As ofDecember 31, 2009, the aggregate rate increase claims brought against ustotaled, approximately, R$310 million, for which we recorded a provision ofR$234 million.

 

Inaddition, in regards to the lawsuits mentioned above, in May 2010 wesettled the lawsuit filed by RIMA Industrial S.A. concerning the reimbursementof the rate increase introduced by DNAEE during the Cruzado Plan. By means of asettlement agreement, we have agreed to pay RIMA Industrial S.A., in additionto the amount of R$ 92 million offset according to previous judicial decisions,the total amount of R$ 85 million, without any monetary adjustment orcorrection and including the lawyers fees, to be paid by deduction from futureinvoices for supply of electricity and use of the distribution system.

 

Weare also a defendant in lawsuits and class actions brought by consumers,consumer rights groups and the office of the public prosecutor of Minas Geraiscontesting the rates we charge our consumers, the application of the rateincreases determined by ANEEL, the inflationary index used to increase ourrates and the rate subsidies granted to low income consumers. These lawsuitsinvolve claims for the suspension of the rate increases and for thereimbursement to our consumers of twice the amount of any additional rates wecollected. All our rate increases are granted based on ANEEL’s priorauthorization and we believe we have a meritorious defense to each of theselawsuits.  It is not possible at thepresent time to estimate the amounts involved in these claims. We have notaccrued any liability related to these claims.

 

Cemig Distribution is a party,together with ANEEL, in a civil public action brought by the Public Attorneys’Office seeking to prevent the exclusion of consumers from the Low IncomeResidential Tariff’s subclass frame and also to require Cemig Distribution topay double the amount overpaid by the low income consumers. The lower courtfound in favor of the Public Attorney’s Office,and Cemig Distribution and ANEEL appealed to the Regional Federal Appeals Court(*Tribunal Regional Federal*). The decisionof the appeals court on the proceeding has been pending since March, 2008.Cemig Distribution assesses its chance of loss as “possible” and estimates theamount involved in such proceeding to be, approximately, R$96.8 million, as of December 31, 2009.

 

*Taxes and Other Contributions*

 

CEMIGand its subsidiaries are parties in several administrative and judicial taxrelated proceedings concerning the imposition of the *ImpostoSobre a Circulação de Mercadorias e Serviços* (state value-addedtax), or ICMS, *Imposto Sobre aPropriedade Territorial Rural* (rural real estate tax), or ITR, *Programa de Integração Social*, or PIS, *Programa deFormação do Patrimônio do Servidor Público*, or PASEP, and *Contribuição para o Financiamento da Seguridade Social*,**or COFINS, (which are social contributions imposed on grossrevenues), *Contribuição Social Sobre o Lucro Líquido*,or CSLL, (social contribution on net profits) and *Imposto deRenda da Pessoa Jurídica*,**or IRPJ(corporate income tax), among others.

 

Since2002, we have been receiving a subsidy from Eletrobras to reimburse us forlosses incurred as a result of the discount we were required to provide tolow-income consumers, under the provisions of Federal Law No. 10,604/02.In 2005, the State of Minas Gerais issued Decree 43,999/05 determining theimposition of ICMS on this subsidy. We believe that the subsidy is not taxable,and, therefore, we are not collecting the ICMS on the amounts derived from thesubsidy. However, the State of Minas Gerais filed a tax foreclosure against usin connection with this matter, demanding the collection of the ICMS. In July 2008,we received an unfavorable decision in the court of first impression. We appealed the decision and received another unfavorabledecision at the second level of trial. The Company filed appeals to theSuperior Court of Justice and to the Federal Supreme Court and is currentlywaiting for a decision. We estimate the amount involved in this dispute tobe approximately R$143 million, as of December 31, 2009. No provision hasbeen recorded with respect to this dispute, since CEMIG assesses its chance ofloss as “possible.”

 

In 2006, CEMIG, CEMIG Distributionand CEMIG Generation and Transmission made advance payments to some of theiremployees in exchange for their rights to future payments, referred to as the “Anuênio.”No income tax or social security contributions were collected in connectionwith those payments, since it is our opinion that such tax and contributionshould not be imposed on such payments. In order to avoid the risk ofimposition of penalties, we filed two writs of mandamus, receiving adversedecisions in the first level of trial. We filed the appropriate appeals, andare still waiting for the decisions at the second level of trial. We estimatethe amount involved in these claims to be approximately R$167 million, as of December 31,2009, consisting of the full amount of judicial deposits from 2006. TheCompanies assess their chance of loss in this dispute as “possible.”

 

We were assessed by the INSS in2006 due to the non-collection of the social security contribution on theamounts paid to our employees as profit sharing in the periodbetween 2000 and 2004. In 2007, we filed a writ of mandamus in order to obtaina judicial decision declaring that such payments were not subject to theimposition of social security contributions. We received a partially favorabledecision in 2008, which we have appealed and are currently waiting for adecision at the second level of trial. The total amount involved in this claimis approximately R$122 million, as of December 31, 2009. No provision has been recorded since CEMIG assesses itschance of loss in this dispute as “possible.”

 

96

----

Table of Contents

 

In1998, CEMIG filed a Writ of Mandamus in which it requested the recognition ofits right to offset the amounts paid as CSLL from the taxable basis of theIRPJ. A preliminary injunction was granted at the time allowing CEMIG tocollect the IRPJ considering the deduction of the CSLL from its taxable basis.The injunction was confirmed at the first level of trial. In view of suchdecision, CEMIG has been offsetting the CSLL from the IRPJ taxable basis, whichresults in a lower IRPJ. The Federal Revenue Attorney General’s presented anappeal and the decision issued at the first level of trial was reversed at inthe second level court. CEMIG presented an appeal to such decision. The amountinvolved in such claim is approximately R$85 million, as of December 31,2009. We estimate the chance of loss in relation to this proceeding as “probable”.On May 2010, CEMIG decided to collect the total amount under discussion,approximately R$ 91.38 million, in order to avoid restraints for the issuanceof negative tax certificates. Nonetheless, the Company is still discussing themerit of the abovementioned proceeding.

 

In2009, state tax authorities issued a tax assessment against CEMIG aiming at thecollection of ICMS allegedly under collected by the Company in 2004, in view ofthe discount of ICMS credits related to the acquisition of goods recorded bythe Company as fixed assets. According to State tax authorities, CEMIG did notfollow the correct procedures for the assessment and discount of the ICMScredits. CEMIG has filed an administrative defense and it is currently waitingfor a decision. The total amount involved in this claim is approximately R$55million, as of December 31, 2009. Noprovision has been recorded since CEMIG assesses its chance of loss in thisdispute as “possible.”

 

*Labor Obligations*

 

CEMIG is a defendant in severalclaims filed by our employees and third parties (outsourced workers). These claimsgenerally relate to overtime and compensation for occupational hazards. Inaddition to these actions, there are others relating to outsourcing of labor,readjustment of retirement pension payments by Forluz and salary adjustments.

 

Under Brazilian labor laws,claimants must file a labor claim for unpaid services within two years of thetermination of their employment agreement (limited to rights which arose nomore than five years prior to termination). As of December 31, 2009, theamount in dispute involved in the aforementioned claims was approximately R$279 million, and we had provisioned R$81 million for the payment of these labor contingencies.

 

InJune 2007, a judgment was rendered against CEMIG in a civil public actionbrought by the Labor Public Attorneys’ Office at the beginning of 2003, aimingto prevent the Company from using outsourcing for its end-activities. In thejudgment, a period of nine months was given for CEMIG to abstain fromcontracting employees through outsourced companies. In March 2008, theHigher Labor Appeal Court**(*Tribunal Superior do Trabalho*) granted a preliminaryinjunction suspending the effects of the prior decision and its consequencesuntil it reaches a final decision. The amount involved in the case isapproximately R$42 million,as of December 31, 2009, with the contingency for loss being assessed as “possible.”

 

*Claims in the Ordinary Course of Business*

 

Weare a party in several civil claims, mainly as a defendant of claims relatingto (i) people who request indemnification due to accidents which haveoccurred during the ordinary course of the business of CEMIG;(ii) consumer claims; and (iii) contractual and other commercialobligations. As of December 31, 2009, the total amount involved in theclaims where the loss is assessed as “probable” is approximately R$168 million,and the total amount involved in the claims where the loss is assessed as “possible”is approximately R$2,117 million.

 

*Legal Proceedings Related to Environmental Matters*

 

Weare a party in a number of proceedings and claims involving environmentalmatters. These proceedings and claims include court and administrative disputesregarding certain environmental matters, protected and Indian areas,environmental licenses and remediation of environmental damages.  As ofDecember 31, 2009, the amount involved in these claims totaledapproximately R$1,211 million on which R$1,187 million is related toproceedings for which the likelihood of loss is assessed as “possible”.

 

Nevertheless,since CEMIG and its subsidiaries are defendants in several class action stylelawsuits, the amounts involved in these proceedings cannot be preciselyassessed, due to the fact that most of these lawsuits aim at addressingenvironmental damages and require the undertaking of indemnification,remediation and compensation measures that will be defined during the process.Additionally, the class action style lawsuits may affect those other than theparties directly involved, and these third parties may be awarded otherremedies as determined by the respective judges and courts. Therefore, thevalues above may not correspond to the actual amounts that will be spent byCEMIG in legal proceedings involving environmental matters.

 

Weare a defendant in a public civil action filed on February 5, 2007 by theRegional Environmental Association of Patrocínio against CEMIG, SouthernElectric and FEAM, which involves a claim for indemnifying and redressingenvironmental 

 

97

----

Table of Contents

 

damagescaused by the Nova Ponte Hydroelectric Power Plant, which amounted to R$1,081million on December 31, 2009.  Thispublic civil action has been awaiting judgment, and the likelihood of loss isassessed as “possible.”

 

Finally,the Minas Gerais Public Attorney filed four class actions against CEMIG,claiming for an order against the company to invest at least 0.5% of the totaloperational revenue of the business year prior to that of the investment on theprotection and environmental preservation of the water tables of municipalitiesrelated to CEMIG’s generation plants, since 1997. This claim is based on theState of Minas Gerais Law No. 12,503, issued on May 31, 1997, and itslikelihood of loss is assessed as “possible”. CEMIG has not yet assessed theamount involved in such lawsuits.

 

*Regulatory Matters*

 

Priorto 1993, electric utilities in Brazil were guaranteed a rate of return oninvestments in assets used to provide electric service to consumers, the ratescharged to consumers 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. Shortfallsexperienced by most electric utilities in Brazil were accounted for in eachcompany’s CRC Account. When the CRC Account and the guaranteed return conceptwere abolished, we used our positive balances in the CRC Account to offset ourliabilities to the Federal Government.

 

ANEEL has brought an administrativeproceeding against us, contesting a credit related to such positive balance. OnOctober 31, 2002 ANEEL issued a final administrative decision. OnJanuary 9, 2004, the Brazilian Federal Treasury Department issued anOfficial Collection Letter to us in the amount of R$516.2 million to be paid byJanuary 30, 2004. We filed a writ of mandamus to suspend its inclusion inthe national non-payers registry, or the Cadin. Although the relief was deniedby the lower court, we appealed to the Federal Court of the First Region whichgranted us a temporary injunction to suspend the inclusion in the Cadin.Therefore, we have not accrued any liability related to this claim. The amountof this proceeding, as of December 31, 2009, is approximately R$1,157 million. No provision has been recorded for this mattersince we assess the chance of an adverse outcome as “possible.”

 

Weare the defendant in suits challenging the charging of tax on public lighting.The value of these claims is approximately R$908.7 million, as ofDecember 31, 2009. We believe we have sound arguments in defense of theseclaims. We assess the likelihood ofa loss in these actions as “possible.”

 

A class action was brought againstCEMIG and nine other defendants requesting nullification of the ConductAdjustment Undertaking (TAC) signed between the Public Attorneys’ Office andthe Company, ordering the restitution to public funds of the amountstransferred to the defendant companies for implementation of the Light for All(*Luz para Todos*) program. The applicationfor interim remedy was refused, and the plaintiff appealed to the RegionalFederal Appeals Court**(*Tribunal Regional Federal*). The updated amount involved, ofR$1,654 million,as of December 31, 2009, refers to the request for restitution of theamounts received by the companies that carried out the services contracted byCEMIG in order to comply with such governmental program, and fees of counsel.The class action has been sent to the State Court, after the Federal Courtdecided that it did not have jurisdiction to hear the case.  The chance of loss is assessed as “possible.”

 

CEMIG has also filed a writ of mandamus in order torequire its qualification as a co-defendant in a claim brought by AES Sulagainst ANEEL. The judge granted CEMIG an injunction to suspend the depositorder in the amount of approximately R$95 million, which was determined in asettlement. In the event of AES Sul’s success, CEMIG will pay such updatedamount. The chance of loss is assessed as “possible.” Currently, the claim brought by AES Sul is in theevidentiary phase. On December, 17, 2009,the judge determined the specification of proofs by the parties.

 

**Dividend Policy and Payments**

 

*Obligatory Dividend—Priority and Amount of Dividends*

 

Underour by-laws, we are required to pay to our shareholders, as obligatorydividends, 50% of the net income of each fiscal year ending December 31,determined in accordance with Brazilian GAAP. Our preferred shares havepriority in the allocation of the obligatory dividend for the period inquestion. The order of priority of the dividends distribution is as follows:

 

·                                          The annual minimum dividend for the preferred shares: These havepreference in the event of reimbursement of shares, and have an annual minimumdividend equal to the greater of the following:

 

·                  10% of their par value; or

 

98

----

Table of Contents

 

·                  3% of the shareholders’ equity associatedwith it.

 

·                                          The dividends on the common shares, up to the minimum percentage for thepreferred shares.

 

Ifa portion of the obligatory dividend remains after the payment of the commondividend, the remaining funds are to be distributed on an equal, pro rata basiswith respect to all preferred shares and common shares.

 

Withoutprejudice to the obligatory dividend, beginning in fiscal year 2005, every twoyears, or shorter period if the Company’s cash position permits, we willdistribute extraordinary dividends, up to the limit of the cash available, asdetermined by the Board of Directors, under the Company’s Strategic GuidelinesPlan and the dividend policy specified in that plan.

 

Theannual dividends declared shall be paid in two equal installments, the first byJune 30 and the second by December 30 of each year. The extraordinarydividends shall be paid as decided by the Board of Directors.

 

Underthe Brazilian Corporate Law, the Board of Directors may declare interimdividends, in the form of interest on capital, to be paid from retainedearnings, income reserves or income reported in semi-annual or quarterlyfinancial statements. Any interim dividends paid shall be calculated based onthe dividend to be paid in the fiscal year in which the interim dividend wasdeclared. Our by-laws authorize our Board of Directors to declare interimdividends. Any interim dividend paid may be set off against the amount of theobligatory dividend payable for the fiscal year in which the interim dividendwas paid.

 

Inthe fiscal years in which we do not have sufficient income to pay dividends toour preferred and common shareholders, the State of Minas Gerais guarantees aminimum dividend of 6% of the par value of the preferred or common shares,respectively, per year to all shares of the Company issued up to August 5,2004 and held by individuals.

 

*Amounts Available for Distribution*

 

Theamount available for distribution is calculated on the basis of the financialstatements prepared in accordance with accounting practices adopted in Braziland the procedures described below.

 

Theobligatory dividend is calculated on the basis of *adjusted netincome*, defined as net income after addition or subtraction of:(a) amounts allocated to the legal reserve, (b) amounts allocated tothe formation of the contingency reserves and reversal of these reserves formedin previous fiscal years, and (c) any unrealized income transferred to theunrealized income reserve account, and any amounts previously posted to thisreserve account which have been realized in the fiscal year and used to offsetlosses.

 

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

 

Underthe Brazilian Corporate Law, income in subsidiaries or affiliated companiesreported by the equity method, and income on term sales, realizable after theend of the next fiscal year, are also considered to be unrealized income.

 

Thetotal of income reserves (with the exception of the reserve for contingenciesrelating to expected losses and the unrealized income reserve), the legalreserve, the special reserves, the reserve for investment projects, andretained earnings may not be greater than the Company’s registered capital. Theamount in excess of our registered capital must be used to increase ourregistered capital or be distributed as cash dividends.

 

Underthe Brazilian Corporate Law and our by-laws, dividends not claimed within threeyears from the date on which they are distributed revert to us.

 

*Interest on Equity*

 

UnderBrazilian law we may pay interest on equity as an alternative for thedistribution of funds to shareholders. Funds distributed as interest on equityqualify within the calculation of minimum dividend established in the by-laws.These amounts may be paid in cash; and the Company may treat them as an expensefor purposes of the calculation of the income tax and the social contributiontax. The total amount paid in interest on equity is limited to the result ofapplication to the Company’s shareholders’ equity of the Long Term InterestRate (TJLP), published by BNDES and may not exceed the greater of (i) 50%of the net income (before taxes for social contribution on net profits, incometax, and the deduction of the interest attributable to shareholders’ equity)for the period in 

 

99

----

Table of Contents

 

respectof which the payment is made or (ii) 50% of retained earnings as of thedate of the beginning of the period in respect of which the payment is made.Shareholders who are not resident in Brazil must register with the BrazilianCentral Bank so that the foreign currency proceeds of their dividend payments,or of sale or other amounts relating to their shares, may be remitted to themoutside Brazil. The preferred shares underlying our Preferred ADSs and thecommon shares underlying our Common ADSs are held in Brazil by the custodianbank, as agent for the depositary bank, which is the registered owner of theshares.

* *

*Currency Exchange*

 

Paymentsof cash dividends and distributions, if any, will be made in *reais* to the custodian on behalf of the depositary bank,which will then convert such proceeds into U.S. dollars and will cause suchU.S. dollars to be delivered to the depositary bank for distribution to holdersof ADRs. In the event that the custodian is unable to immediately convert the *reais* received as dividends into U.S. dollars, the amount ofU.S. dollars payable to holders of ADRs may be adversely affected bydevaluations of the *real* that occurbefore such dividends are converted and remitted. The*real* appreciated approximately 24.7%relative to the U.S. dollar in 2009. See “Item 3. KeyInformation—Risk Factors—Risks Relating to Brazil— The Federal Governmentexercises significant influence on the Brazilian economy. Political andeconomic conditions can have a direct impact on our business.”

 

Dividendsin respect of the preferred shares and common shares paid to holders who arenot Brazilian residents, including holders of Preferred ADSs and Common ADSs,are generally not subject to Brazilian withholding tax, although in generalpayments of interest on capital are subject to withholding tax. See “Item 10.Additional Information—Taxation—Brazilian Tax Considerations—Taxation ofDividends” and “—U.S. Tax Considerations—Taxation of Distributions.” There isno specific record date upon which the depositary bank will determine theexchange rate to be used in connection with converting cash dividends or othercash distributions. Pursuant to the Deposit Agreements, the depositary bank willarrange for the funds to be converted into U.S. dollars upon receipt of noticeof cash dividends or other cash distributions.

 

*History of Dividend Payments*

 

Thefollowing table sets forth the recent history of declarations of dividends andinterest on capital on our common shares and preferred shares. For each year inthe table, the payment of the dividends occurred during the year followingdeclaration. For the periods indicated, the dividends paid per 1,000 commonshares and per 1,000 preferred shares (per one common share and per onepreferred share, subsequent to the share consolidation on June 11, 2007)were the same. See “Item 3. Key Information—Selected Consolidated FinancialData.”

 

**Declaration History of Dividends and Interest onCapital (1)**

 
| ** **             | ** ** | **Common Shares** | ** ** | **Preferred Shares** | ** ** |
|------------------------|------------|------------------------|------------|---------------------------|------------|
| **Dividend Year** | ** ** | **(R$)(2)**            | ** ** | **(US$)(3)**              | ** ** | **(R$)(2)** | ** ** | **(US$)(3)** | ** ** |
| 2006                   |       | 603,948,640            |       | 298,836,536               |       | 777,832,359 |   | 384,874,992 |   |
| 2007                   |       | 379,426,703            |       | 227,392,246               |       | 488,297,923 |   | 292,639,292 |   |
| 2008                   |       | 412,568,595            |       | 190,853,770               |       | 530,949,405 |   | 245,616,600 |   |
| 2009 (4)               |       | 406,964,431            |       | 235,171,586               |       | 523,737,206 |   | 302,650,798 |   |

 

----

(1)                                  In accordance with theaccounting practices adopted in Brazil, dividends and interest on capital areaccounted for as having been paid in the dividend year in which they are proposed,even if such dividends or interest on capital were formally approved by ashareholders’ meeting in the following year.

(2)                                  *Real* amounts areexpressed in nominal *reais*.

(3)                                  U.S. dollar amounts arecalculated by dividing the amount of dividends paid, expressed in nominal *reais*, by the Federal Reserve Board’s rate on respectiveRecord Dates (April 26, 2007, April 25, 2008, April 29, 2009 andApril 29, 2010).

(4)                                  The 2009 dividends wereapproved at the ordinary and special general shareholders’ meetings held onApril 29, 2010. The 2009 dividends will be paid in two equal installmentsin June 2010 and December 2010. The first installment will be paid byJune 30, 2010.

 

**Significant Changes**

 

Asignificant change in our financial condition since the date of our financialstatements that are included in this annual report on Form 20-F is theissuance of the following debt:

 

·                                          OnJanuary 15, 2010, Cemig Generation and Transmission made its second publicissuance of common debentures in a total amount of R$2,700 million. Thedebentures are unsecured, not convertible into shares, with a nominal unitvalue of R$10,000. The first series of debentures will mature on

 

100

----

Table of Contents

 

January 15, 2012 and the second seriesof debentures will mature on January 15, 2015, with three annualinstallments in 2013, 2014 and 2015. The debentures of the first series willearn interest corresponding to 100% of the CDI, plus a spread of 0.9% per year,calculated based on a 252 business day year. As to the second series of thedebentures, we are obligated to pay to the debenture holders an amount equal tothe indexed outstanding par value of the debentures by IPCA (Índice Nacional dePreços ao Consumidor Amplo) plus annual interest of 7.6796%. The proceeds fromthis issuance were fully used in the early redemption of the third issuance ofcommercial paper of the company. The debêntures are guaranteed by CEMIG.

 

·                                          On May 27, 2010, Cemig Distribution issued two notes (Cédulas deCrédito Comercial) in favor of Banco do Brasil S.A., in the total amount ofR$600 million, with maturity date of May 10, 2013, and the effective rateof interest is 11.43% per annum. Additionally, Cemig Distribution made a swaptransaction with Banco do Brasil, in the same amount of the notes, substitutingthe stated interest rate 11.47% per annum for the rate of 96% of CDI. One ofthe notes, in the amount of R$230 million, had its proceeds used to roll overexisting debt and is guaranteed by CEMIG. The other note, in the amount ofR$370 million, had its proceeds used to improve the company’s working capitaland is guaranteed by receivables.

 

**Item 9.****          ****TheOffer and Listing**

 

**Trading Market**

 

Theprincipal trading market for our preferred shares is the BM&FBovespa. OurPreferred ADSs, each representing one preferred share as of December 31,2009, have traded on the NYSE under the symbol “CIG” since September 18,2001. Prior to that date, our Preferred ADSs were traded in theover-the-counter, or OTC, market in the United States. The Preferred ADSs areevidenced by Preferred ADRs issued by Citibank, N.A., as depositary, pursuantto a Second Amended and Restated Deposit Agreement, dated as of August 10,2001, as amended on June 11, 2007, by and among us, the depositary and theholders and beneficial owners of Preferred ADSs evidenced by Preferred ADRsissued thereunder. As of December 31, 2009, there were approximately123,812,242 Preferred ADSs outstanding (each representing one preferred share),representing approximately 35.45% of our 349,222,649 outstanding preferredshares.

 

Theprincipal trading market for our common shares is the BM&FBovespa. OurCommon ADSs, each representing one common share as of December 31, 2009,have traded on the NYSE under the symbol “CIG.C” since June 12, 2007, whenwe established an American Depositary Shares program for our common shares. TheCommon ADSs are evidenced by Common ADRs issued by Citibank, N.A., as depositary,pursuant to a Deposit Agreement, dated as of June 12, 2007, by and amongus, the depositary and the holders and beneficial owners of Common ADSsevidenced by Common ADRs issued thereunder. As of December 31, 2009, therewere approximately 1,085,343 Common ADSs outstanding (each representing onecommon share), representing less than 0.40% of our 271,154,243 outstandingcommon shares.

 

OnJune 11, 2010, the closing price per preferred share on theBM&FBovespa was R$25.00 and the closing price per Preferred ADS on the NYSEwas US$14.06.

 

OnJune 12, 2007, our common share ADSs began trading on the NYSE. On June 11,2010, the closing price per common share on the BM&FBovespa wasR$18.90  and the closing price per CommonADS on the NYSE was US$10.80.

 

Thefollowing table sets forth the reported high and low closing sale prices forthe preferred and common shares on the BM&FBovespa and the Preferred andcommon ADSs on the NYSE for the periods indicated.

 
| ** ** | ** ** | **Common Shares (1)**   | ** ** | **Common ADSs (1)** | ** ** | **Preferred Shares(2)** | ** ** | **Preferred ADSs (2)** | ** ** |
|------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Price in Nominal R$** | ** ** | **Price in US$**    | ** ** | **Price in Nominal R$** | ** ** | **Price in US$**       | ** ** |
| **Period** | ** ** | **High**                | ** ** | **Low**             | ** ** | **High**                | ** ** | **Low**                | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2005       |       | 13.12                   |       | 6.85                |       | —                  |       | —                 |       | 16.30 |   | 8.69 |   | 10.00 |   | 4.71 |   |
| 2006       |       | 16.86                   |       | 12.83               |       | —                  |       | —                 |       | 20.28 |   | 15.14 |   | 13.02 |   | 8.75 |   |
| 2007       |       | 25.93                   |       | 15.95               |       | 14.50                   |       | 10.38                  |       | 26.14 |   | 18.39 |   | 17.49 |   | 11.53 |   |
| 2008       |       | 21.80                   |       | 13.68               |       | 13.66                   |       | 6.41                   |       | 27.04 |   | 17.07 |   | 21.82 |   | 10.68 |   |
| 2009       |       | 22.40                   |       | 14.41               |       | 12.90                   |       | 6.22                   |       | 29.78 |   | 20.35 |   | 17.12 |   | 10.39 |   |
|       |       |                    |       |                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| 2008       |       |                    |       |                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| 1Q         |       | 19,69                   |       | 15.43               |       | 11.53                   |       | 9.29                   |       | 21.07 |   | 17.07 |   | 15.90 |   | 12.26 |   |
| 2Q         |       | 21.80                   |       | 16.51               |       | 13.38                   |       | 10.09                  |       | 25.95 |   | 19.44 |   | 20.51 |   | 14.50 |   |
| 3Q         |       | 21.73                   |       | 16.54               |       | 13.66                   |       | 8.86                   |       | 27.04 |   | 19.99 |   | 21.82 |   | 13.21 |   |
| 4Q         |       | 20.62                   |       | 13.68               |       | 10.96                   |       | 6.41                   |       | 25.08 |   | 19.27 |   | 16.84 |   | 10.68 |   |

 

101

----

Table of Contents

 
| 2009               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| 1Q                 |   | 16.54  |   | 14.41  |   | 7.41   |   | 6.22   |   | 22.74  |   | 20.35  |   | 13.01  |   | 10.39  |   |
| 2Q                 |   | 18.00  |   | 16.34  |   | 9.47   |   | 7.35   |   | 24.76  |   | 21.56  |   | 13.98  |   | 10.71  |   |
| 3Q                 |   | 18.66  |   | 17.11  |   | 10.86  |   | 8.61   |   | 24.58  |   | 22.08  |   | 13.43  |   | 11.29  |   |
| 4Q                 |   | 22.40  |   | 18.09  |   | 12.90  |   | 10.66  |   | 29.78  |   | 22.99  |   | 17.12  |   | 12.95  |   |
|               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2010               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1Q                 |   | 21.24  |   | 18.83  |   | 12.58  |   | 10.02  |   | 27.70  |   | 24.51  |   | 16.26  |   | 13.34  |   |
| 2Q                 |   | 21.86  |   | 18.00  |   | 12.85  |   | 10.00  |   | 28.49  |   | 23.90  |   | 16.77  |   | 13.19  |   |
|               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| January 2010  |   | 21.24  |   | 19.61  |   | 12.58  |   | 10.83  |   | 27.58  |   | 25.37  |   | 16.25  |   | 13.93  |   |
| February 2010 |   | 20.23  |   | 19.26  |   | 11.05  |   | 10.26  |   | 26.97  |   | 25.22  |   | 14.81  |   | 13.50  |   |
| March 2010    |   | 19.97  |   | 19.29  |   | 11.48  |   | 10.87  |   | 26.62  |   | 25.47  |   | 15.04  |   | 14.13  |   |
| April 2010    |   | 21.50  |   | 19.47  |   | 12.06  |   | 11.09  |   | 27.55  |   | 25.13  |   | 16.14  |   | 14.46  |   |
| May 2010      |   | 21.86  |   | 19.12  |   | 12.85  |   | 10.00  |   | 25.47  |   | 28.49  |   | 16.77  |   | 13.65  |   |
| June 2010 (3) |   | 19.31  |   | 18.00  |   | 11.32  |   | 10.05  |   | 23.90  |   | 25.67  |   | 14.71  |   | 13.19  |   |

 

----

(1)                                  On May 3, 2007, a 50%stock dividend was paid on the common shares, resulting in an adjustment to theprice per common share. The last day of trading of the common shares in lots of1,000 shares was June 1, 2007. A reverse stock split of the common shareswas effected in the form of a share consolidation on June 4, 2007 wherebyevery 500 common shares, par value of R$0.01, were consolidated into one commonshare with a par value of R$5.00. The price per common share was adjustedaccordingly. In addition, On May 2, 2008, a 2.02% stock dividend was paid onthe common shares, resulting in an adjustment to the price per common share. OnMay 8, 2008, a corresponding adjustment was made to the Common ADSsthrough the issuance of additional Common ADSs, resulting in an adjustment tothe price per Common ADS. On April 29, 2009, a 25.000000151% stockdividend was paid on the common shares, resulting in an adjustment to the priceper common share. On May 14, 2009, a corresponding adjustment was made tothe Common ADSs through the issuance of additional Common ADS, resulting in anadjustment to the price per Common ADS. On April 29, 2010, a 10.000000128%stock dividend was paid on the common shares, resulting in an adjustment to theprice per common share. On May 10, 2010, a corresponding adjustment was madeto the Common ADSs through the issuance of additional Common ADS, resulting inan adjustment to the price per Common ADS. The common share prices and CommonADS prices have been adjusted to reflect all of the above items.

(2)                                  On May 3, 2007, a 50%stock dividend was paid on the preferred shares, resulting in an adjustment tothe price per preferred share. On May 7, 2007, a corresponding adjustmentwas made to the ADSs through the issuance of one additional ADS for every twoADSs, resulting in an adjustment to the price per ADS. The last day of tradingof the preferred shares in lots of 1,000 shares was June 1, 2007. Areverse stock split of the preferred shares was effected in the form of a shareconsolidation on June 4, 2007 whereby every 500 preferred shares, parvalue of R$0.01, were consolidated into one preferred share with a par value ofR$5.00. In addition, a 100% forward split of the ADSs was effected onJune 11, 2007. The price per preferred share and Preferred ADS wereadjusted accordingly. In addition, on May 2, 2008, a 2.02% stock dividendwas paid on the preferred shares, resulting in an adjustment to the price perpreferred share. On May 8, 2008, a corresponding adjustment was made tothe Preferred ADSs through the issuance of additional Preferred ADS, resultingin an adjustment to the price per Preferred ADS. On April 29, 2009, a25.000000151% stock dividend was paid on the preferred shares, resulting in anadjustment to the price per preferred share. On May 14, 2009, acorresponding adjustment was made to the Preferred ADSs through the issuance ofadditional Preferred ADS, resulting in an adjustment to the price per PreferredADS. On April 29, 2010, a 10.000000128% stock dividend was paid on thepreferred shares, resulting in an adjustment to the price per preferred share.On May 10, 2010, a corresponding adjustment was made to the Preferred ADSsthrough the issuance of additional Common ADS, resulting in an adjustment tothe price per Common ADS. The preferred share prices and Preferred ADS priceshave been adjusted to reflect all of the above items.

(3)                                                     Through June 11, 2010.

 

SinceJuly 12, 2002, our depositary receipts have been traded on the LATIBEX,under the ticker symbol “XCMIG.” The LATIBEX is an electronic trading marketcreated in 1999 by the Madrid Stock Exchange in order to facilitate the tradingmarket of Latin American Securities in Euros.

 

102

----

Table of Contents

 

**Tradingon the BM&FBovespa**

 

Thepreferred shares and common shares are traded on the BM&FBovespa, the onlyBrazilian stock exchange that trades shares. Trading on the BM&FBovespa islimited to brokerage firms and a limited number of authorized entities. The CVMand BM&FBovespa have discretionary authority to suspend trading in sharesof a particular issuer under certain circumstances.

 

Ifyou were to trade in the preferred shares or common shares on theBM&FBovespa, your trade would settle in three business days after the tradedate. Delivery of and payment for shares is made through the facilities of aseparate clearinghouse, which maintains accounts for brokerage firms. Theseller is ordinarily required to deliver the shares to the exchange on thesecond business day following the trade date. The clearinghouse for the BM&FBovespa is Companhia Brasileira de Liquidação e Custódia(CBLC).

 

Inorder to better control volatility, the BM&FBovespa has adopted a “circuitbreaker” system pursuant to which trading sessions may be suspended for aperiod of 30 minutes whenever the index of this stock exchange falls more than10% from the index registered for the previous trading session, and anadditional period of one hour if the index falls 5% or more after the reopeningof trading.

 

TheBM&FBovespa is less liquid than the NYSE and other major exchanges in theworld. As of December 31, 2009, the aggregate market capitalization of the385 companies listed on the BM&FBovespa was equivalent to approximatelyR$1.3 trillion and the 10 largest companies listed on the BM&FBovesparepresented approximately 53.03% of the total market capitalization of alllisted companies. Although any of the outstanding shares of a listed companymay be traded on a Brazilian stock exchange, in most cases fewer than half ofthe listed shares are actually available for trading by the public. Theremainder of these shares is held by small groups of controlling persons,governmental entities or one principal shareholder.

 

Ourpreferred shares and common shares have daily liquidity on the BM&FBovespaand have had no suspension of trading in the past five years other than due toBM&FBovespa utilizing circuit breakers on a few occasions in 2008 withrespect to the trading of all shares on the BM&FBovespa.

 

Wehave been a member of Special Corporate Governance Level 1 of theBM&FBovespa since October 2001. As a result, we have agreed to do thefollowing:

 

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

 

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

 

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

 

·                  disclose the amount and characteristics ofour securities held directly or indirectly by insiders;

 

·                  disclose changes in the amount of securitiesheld by insiders within the preceding 12 months;

 

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

 

·                  disclose, at the end of January of eachyear, an annual schedule of corporate events, and any subsequent changes to theschedule;

 

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

 

·                  hold at least one annual meeting with marketanalysts and any other interested parties; and

 

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

 

103

----

Table of Contents

 

Areview of the rules applicable to Corporate Governance Level 1 listedcompanies is being proposed, hence these rules may be changed. Newdisclosure requirements may be established if the revision is approved.

 

*Disclosure of Trading by Insiders*

 

Braziliansecurities regulations require our controlling shareholders, management,members of our Fiscal Council and any other technical or advisory body todisclose to us, the CVM and the BM&FBovespa the number and types ofsecurities issued by us, our subsidiaries and our controlling companies thatare held by them or by persons closely related to them and any changes in theirrespective ownership positions during the preceding 12 months. The informationregarding the acquisition of such securities (amount, price and date ofacquisition) must be provided to us within 10 days of the end of the month inwhich they were acquired.

 

*Disclosure of Material Developments*

 

UnderBrazilian securities regulations, we must disclose any material developmentrelated to our business to the CVM and the BM&FBovespa. We are alsorequired to publish a notice of those material developments. A development isdeemed material if it has a material impact on: the price of our securities,the decision of investors to trade in our securities or the decision ofinvestors to exercise any rights as holders of any of our securities. Underspecial circumstances, we may submit to the CVM a request for confidentialtreatment for certain material developments.

 

Tradingon Brazilian stock exchanges by non-residents of Brazil is subject tolimitations under Brazilian foreign investment legislation. See “Item 10.Additional Information—Exchange Controls.”

 

**Regulation of Brazilian Securities Markets**

 

TheBrazilian securities markets are principally governed by Law No. 6,385,dated December 7, 1976, and the Brazilian Corporate Law, each as amendedand supplemented, and by regulations issued by the CVM, the National MonetaryCouncil (“CMN”), and the Central Bank, which has, among other powers, licensingauthority over brokerage firms, and which regulates foreign investments andforeign exchange transactions.

 

Underthe Brazilian Corporate Law, a corporation is either publicly owned, such as weare, or closely held (*companhia fechada*)*.*All publicly owned companies, including us, are registeredwith the CVM and are subject to reporting requirements. Our shares are tradedon the BM&FBovespa, but may be traded privately subject to certainlimitations. The Brazilian OTC market consists of direct trades and tradesbetween individuals in which a financial institution registered with the CVMserves as intermediary.

 

Wehave the option to ask that trading in our securities on the BM&FBovespa besuspended in anticipation of a material announcement. Trading may also besuspended on the initiative of the BM&FBovespa or the CVM based on or dueto, among other reasons, a belief that a company has provided inadequateinformation regarding a material event or has provided inadequate responses toinquiries by the CVM or the stock exchange.

 

Brazilianlaw provides general restrictions on unfair trading practices and marketmanipulation, although in Brazil there may be fewer instances of enforcementactions and judicial precedent is less well defined than in certain othercountries.

 

Tradingon the BM&FBovespa by non-residents of Brazil is subject to limitationsunder Brazilian foreign investment and tax legislation. The Brazilian custodianfor the preferred shares or the common shares must obtain registration from the Central Bank of Brazil to be eligibleto remit for the remittance of funds U.S. dollars abroad for payments ofdividends, any other cash disbursements, or upon the disposition of the sharesand sales proceeds thereof. In the event that a holder of Preferred ADSsexchanges its Preferred ADSs for preferred shares or a holder of Common ADSsexchanges its Common ADSs for common shares, the holder will be entitled tocontinue to rely on the depositary bank’s certificate of registration for fivebusiness days after the exchange. Thereafter, the holder may not be able toobtain and remit U.S. dollars abroad upon the disposition of the preferredshares or common shares, or distributions relating to the preferred shares orcommon shares, unless the holder qualifies for and obtains a new certificate ofregistration. See “Item 10. Additional Information—Exchange Controls.”

 

**Item 10.****   ****Additional Information**

 

**Memorandum and Articles of Association**

 

Weare a state-controlled company registered under the laws of Brazil. Theregistration number given to us by the Board of Trade of Minas Gerais (*Junta Comercial do Estado de Minas Gerais*) is 31300040127.Set forth below is a brief summary of certain

 

104

----

Table of Contents

 

significantprovisions of (i) our by-laws, as amended by our general and specialshareholders’ meeting on April 29, 2009, and (ii) Brazilian CorporateLaw. The description of our by-laws contained herein does not purport to becomplete and is qualified by reference to our by-laws, which have been filed asan exhibit to this annual report.

 

*Object and Purpose*

 

Asdescribed in Article 1 of our by-laws, we have four main purposes:(i) to construct and operate electric power generation, transformation,transmission and distribution systems and to trade electric power and relatedservices; (ii) to develop commercial activities in the energy field;(iii) to render consulting services to companies in Brazil and abroadrelated to our industry; and (iv) to perform activities directly orindirectly relating to our corporate purposes.

 

*Preferred Shares*

 

Holdersof preferred shares have the right to receive annual minimum dividends in anamount equal to the greater of 10% of the par value of each preferred share or3% of the net worth value associated with each preferred share. Holders of ourpreferred shares also will have priority over any other class of shares if wedecide to redeem shares. A preferred share does not entitle its owner to voteat the general shareholders’ meetings.

 

*Share Subscription*

 

Sharespurchased by the State Government, which must constitute at all times themajority of our voting shares, are paid for in accordance with the BrazilianCorporate Law. Shares purchased by other shareholders (whether natural personsor companies) shall be paid for in accordance with the decision resulting fromthe general meeting of shareholders that addresses the matter.

 

Article 171of the Brazilian Corporate Law provides that each shareholder has a generalpreemptive right to subscribe for new shares or convertible securities issuedin any capital increase, in proportion to that shareholder’s shareholding,except in the event of the exercise of any option to acquire shares of ourcapital stock. Shareholders must exercise their preemptive rights within 30days after the publication of the notice of capital increase.

 

Inthe event of a capital increase, holders of Preferred ADSs, which representpreferred shares, and holders of Common ADSs, which represent common shares,would have preemptive rights to subscribe only to newly issued preferred sharesor common shares, as the case may be, in proportion to their shareholdings butmay not be able to exercise these rights because of U.S. securities lawlimitations. See “Item 3. Risk Factors—Risks Relating to the Preferred Shares,Preferred ADSs and Common ADSs—You may not be able to exercise preemptiverights with respect to our securities.”

 

*Minority Shareholders*

 

Ourby-laws provide that the preferred and minority common shareholders areentitled to elect one member and an alternate to the Board of Directors, asmore fully described in “—Rights of Shareholders—Rights of MinorityShareholders.”

 

*Dividends*

 

Fora discussion of our dividend policy, see “Item 8. FinancialInformation—Dividend Policy and Payments.”

 

*General Meetings*

 

Generalmeetings of shareholders are held for any legal purpose, as provided by theBrazilian Corporate Law. Ordinary general meetings of shareholders are heldwithin the first four months of the fiscal year and are called upon 15 daysprior notice. The Brazilian Corporate Law also provides that the followingactions may only be taken at a shareholders’ meeting:

 

·                  amendment of our by-laws;

 

·                  increases or decreases to our issued capital stock or subscription ofnew shares;

 

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

 

·                  authorization of the issuance of debentures or any convertible securities;

 

·                  suspension of the rights of a shareholder who has violated BrazilianCorporation Law or our by-laws;

 

105

----

Table of Contents

 

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

 

·                  acceptance or rejection of the valuation of in-kind contributionsoffered by a shareholder in consideration for the issuance of shares of ourcapital stock;

 

·                  approval of our transformation into a limited liability company (*sociedade empresária limitada*) or any other corporate form;

 

·                  approval of any dissolution or liquidation, the appointment and dismissalof the respective liquidator and review of the reports prepared by him or her;

 

·                  any action regarding an application for bankruptcy or compulsoryrescheduling of our debts;

 

·                  approval of the financial statements on an annual basis; and

 

·                  cancellation of registration with the CVM as a publicly-held company ordelisting of our common shares from the BM&FBovespa, except in the case ofa privatization tender offer.

 

Asa general rule, the affirmative vote of shareholders representing at least themajority of our issued and outstanding common shares present in person orrepresented by proxy at a shareholders’ meeting is required to approve orratify any proposed action, and abstentions are not taken into account.However, the affirmative vote of shareholders representing one half of ourissued and outstanding voting capital is required to:

 

·                  create preferred shares or to increase disproportionately an existingclass of preferred shares relative to the other classes of shares, unless suchaction is provided for or authorized by our by-laws;

 

·                  modify a preference, privilege or condition of redemption oramortization conferred on one or more classes of preferred shares, or to createa new class with greater privileges than the existing classes of preferred shares;

 

·                  reduce the percentage of mandatory dividends;

 

·                  change our corporate purpose;

 

·                  merge us with another company if we are not the surviving company orconsolidate us with another company;

 

·                  spin off a portion of our assets or liabilities;

 

·                  approve our participation in a group of companies;

 

·                  apply for cancellation of liquidation status;

 

·                  approve our dissolution; and

 

·                  approve the compulsory transfer of all of our shares to another companyin order to make us a wholly-owned subsidiary of that other company (*incorporação de ações*).

 

Shareholdersmay be represented at a shareholders’ meeting by an attorney-in-fact appointedno more than one year prior to the meeting date. To be eligible to represent ashareholder in a shareholders’ meeting, the attorney-in-fact must be ashareholder, one of our executive officers or directors or an attorney-at-law.In a publicly held corporation, such as ours, the attorney-in-fact may also bea financial institution.

 

Subjectto the provisions of the Brazilian Corporate Law and our by-laws, our Board ofDirectors may ordinarily call our shareholders’ meetings. These meetings mayalso be called by:

 

·                  the Fiscal Council, if the Board of Directors fails to call a generalshareholders’ meeting within one calendar month after the date it was requiredto do so under applicable laws or a special shareholders’ meeting in the caseof serious and 

 

106

----

Table of Contents

 

urgent matters affecting us; anyshareholder, whenever the executive officers fail to call the meeting ofshareholders within 60 days of being required to do so by the BrazilianCorporate Law or by our by-laws; and

 

·                  shareholders holding at least five percent of our capital stock, if ourBoard of Directors fails to call a meeting within eight days after receipt of arequest from that shareholder to call the meeting that indicates the issues tobe discussed or calls for the creation of the Fiscal Council.

 

*Board of Directors*

 

Ourby-laws mandate that our Board of Directors shall be comprised of 14 directorsand 14 alternates. One director is designated a chairman and another directoris designated the vice-chairman.

 

OurBoard of Directors is responsible for:

 

·                  establishing the general direction of our business;

 

·                  electing and dismissing executive officers;

 

·                  approving the sale or pledge of our fixed assets, or the granting ofguarantees to third parties, with a value of at least R$14 million;

 

·                  approving, upon proposal by the Board of Executive Officers, the sale orthe creation of any “in rem” guarantees with respect to our permanent assetsand the granting by us of any personal guarantee to any third party in anamount exceeding R$14 million;

 

·                  approving, upon a proposal by the Board of Executive Officers, loans,financings, agreements and any actions which would bind us in an amountexceeding R$14 million;

 

·                  calling the general meetings of shareholders;

 

·                  supervising the management of the Board of Executive Officers, reviewingour books and documents and requesting information regarding executed andsoon-to-be executed contracts, as well as other items of interest;

 

·                  previously manifestation regarding the management report and theaccountability of the Board of Directors , to be submitted for the AnnualShareholders’ Meeting approval;

 

·                  approving our annual and interim financial statements;

 

·                  appointing and dismissing independent auditors;

 

·                  approving, upon proposal by the Board of Executive Officers, thecommencement or waiver of bidding proceedings for the purchase of goods orservices with a value of at least R$14 million;

 

·                  authorizing, upon proposal by the Board of Executive Officers, legal andadministrative action to be taken on our behalf and the settlement of judicialand extra judicial matters in which we are involved with a value of at leastR$14 million;

 

·                  approving the issuance of securities (debentures, commercial papers, *notas promissórias*, among others) in thelocal and international capital markets;

 

·                  delegating to Board of Executive Officers the power to authorizesignature contracts of commercialization of electric energy or renderingdistribution and transmission services, in terms of legislation;

 

·                  approving CEMIG’s long-term strategic plan, the multi-year strategicimplementation plan, and the annual budget, and any alterations or revisionsthereto;

 

107

----

Table of Contents

 

·                  annually, setting the directives and establish the limits, includingfinancial limits, for spending on personnel, including concession of benefitsand collective work agreements, subject to the competency of the shareholdersmeeting and in obedience to the annual budget approved;

 

·                  authorizing the exercise of the right of preference under Stockholders’agreements or to vote in wholly-owned subsidiaries, jointly-controlledcompanies, affiliated companies and the consortia in which CEMIG participates,except in the case of CemigDistribution and CemigGeneration and Transmission, for which the competency to decide on thesematters shall be that of the shareholders meeting; and

 

·                  approving the declarations of vote in the shareholders meetings and theorientations for voting in the meetings of the boards of directors of thewholly-owned subsidiaries, jointly-controlled companies, affiliated companiesand the consortia in which CEMIG participates, when participation in thecapital of other companies or consortia is involved, and the decisions must, inany event and not only in matters relating to participation in the capital ofother companies or consortia, obey the provisions of the bylaws, the long-termstrategic plan and the multi-year strategic implementation plan.

 

Underthe Brazilian Corporate Law, directors of a corporation generally have certainduties equivalent to those imposed under the laws of most states of the UnitedStates, including a duty of loyalty to the corporation, a duty to refrain fromself dealing and a duty to use reasonable care in the management of thecorporation’s affairs. Our directors and officers may be held liable forbreaches of duty to us and our shareholders and may be subject to judicialactions in proceedings brought by government agencies or our shareholders.

 

Thereare no provisions in our by-laws with respect to (i) a director’s power tovote on proposals or contracts in which such director is materially interested,(ii) borrowing powers exercisable by the directors, (iii) age limitsfor retirement of board members, and (iv) number of shares required fordirector qualification.

 

Thechairman and vice-chairman of our Board of Directors are chosen by our Board ofDirectors at its first meeting following the election of the board members. Thevice chairman of our Board of Directors will act as a temporary replacement forour chairman when the chairman is absent or impeded from exercising hisfunctions.

 

Ourshareholders have the responsibility of setting the remuneration of the boardmembers at the General Meeting of Stockholders at which the board members areelected.

 

**Rights of Shareholders**

 

Weextend to our shareholders all of the rights that are provided under Brazilianlaw. Our by-laws are in compliance with the Brazilian Corporate Law.

 

*Essential Rights*

 

Article 109of the Brazilian Corporate Law provides that a corporation may not deny certainrights to its shareholders under any circumstances. These shareholders’ rightsinclude:

 

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

 

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

 

·                  the right to supervise our management according to the BrazilianCorporate Law;

 

·                  preemptive rights to subscribe new shares or securities convertible intoshares, except for exceptions provided by the Brazilian Corporate Law and ourby-laws; and

 

·                  the right to withdraw from the company under certain circumstancesprovided in the Brazilian Corporate Law.

 

*Voting Rights*

 

Asa general rule, only our common shares are entitled to vote and each commonshare corresponds to one vote. Holders of preferred shares acquire votingrights if, during three consecutive fiscal years, we fail to pay a fixed orminimum dividend to which

 

108

----

Table of Contents

 

thepreferred shares are entitled. If a holder of preferred shares acquires votingrights in this manner, such rights will be identical to the voting rights of aholder of common shares and will continue until the dividend is paid. Norestrictions exist on the right of a holder of common shares or preferredshares to exercise voting rights with respect to such shares by virtue of such holderbeing a non-resident of Brazil or a citizen of a country other than Brazil.However, holders of Preferred ADSs may only vote the underlying preferredshares through the depositary according to the terms of the Second Amended andRestated Deposit Agreement, and holders of Common ADSs may only vote theunderlying common shares through the depositary according to the terms of theCommon ADS Deposit Agreement. In any circumstance in which holders of preferredshares are entitled to vote, each preferred share will entitle its holder toone vote.

 

*Redemption Rights*

 

Ourcommon shares and preferred shares are not redeemable, except that a dissentingshareholder is entitled under Brazilian Corporate Law to obtain redemption upona decision made at a shareholders’ meeting by shareholders representing atleast 50% of the voting shares:

 

to create a new class of preferred shares or to disproportionatelyincrease an existing class of preferred shares relative to the other classes ofshares (unless such actions are provided for or authorized by the by-laws);

 

to modify a preference, privilege or condition of redemption oramortization conferred on one or more classes of preferred shares, or to createa new class with greater privileges than the existing classes of preferredshares;

 

to reduce the mandatory distribution of dividends;

 

to change our corporate purposes;

 

to merge us with another company or consolidate us;

 

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

 

to approve the acquisition of control of another company at a pricethat exceeds certain limits set forth in Brazilian Corporate Law;

 

to approve our participation in a centralized group of companies asdefined under Brazilian Corporate Law; or

 

in the event that the entity resulting from (a) a merger,(b) a transfer of shares as described in clause (6) above or(c) a spin-off that we conduct fails to become a listed company within 120days of the shareholders’ meeting at which such decision was taken.

 

Onlyholders of shares adversely affected by the changes mentioned in items(1) and (2) above may require us to redeem their shares. The right ofredemption mentioned in items (5), (6) and (8) above may only beexercised if our shares do not satisfy certain tests of liquidity at the timeof the shareholder resolution. The right of redemption lapses 30 days afterpublication of the minutes of the relevant shareholders’ meeting, unless, inthe case of items (1) and (2) above, the resolution is subject toconfirmation by the preferred shareholders (which must be made at a specialmeeting to be held within one year), in which case the 30-day term is countedfrom the publication of the minutes of the special meeting.

 

Wewould be entitled to reconsider any action giving rise to redemption rightswithin 10 days following the expiration of such rights if the redemption ofshares of dissenting shareholders would jeopardize our financial stability. LawNo. 9,457 dated May 5, 1997, which amended Brazilian Corporate Law,contains provisions which, among other provisions, restrict redemption rightsin certain cases and allow companies to redeem their shares at their economicvalue, subject to certain requirements. Our by-laws currently do not providethat our capital stock will be redeemable at its economic value and,consequently, any redemption pursuant to Brazilian Corporate Law would be madeat no less than the book value per share, determined on the basis of the lastbalance sheet approved by the shareholders; provided that if the generalshareholders’ meeting giving rise to redemption rights occurred more than 60days after the date of the last approved balance sheet, a shareholder would beentitled to demand that his or her shares be valued on the basis of a newbalance sheet dated within 60 days of such general shareholders’ meeting.

 

*Rights of Minority Shareholders*

 

TheBrazilian Corporate Law provides that shareholders who own at least 5% of thecapital stock of a corporation are afforded the following rights, among others:

 

109

----

Table of Contents

 

·                  the right to require that the books of the corporation be made availablefor review, whenever these shareholders become suspicious that Brazilian law orthe corporation’s by-laws have been violated, or that irregularities have beencommitted by the management of the corporation;

 

·                  the right to call a general meeting of shareholders, under certaincircumstances, whenever the corporation’s directors or officers, as the casemay be, fail to do so; and

 

·                  the right to file an action for indemnification by directors orofficers, as the case may be, for damages caused to the assets of thecorporation, whenever it is determined at the general meeting of shareholdersthat such a claim shall not be filed.

 

Minorityshareholders that own, individually or in the aggregate, our outstanding commonshares (since at least 10% of our outstanding common shares are held byminority shareholders), and also holders of our preferred shares, have theright to appoint one member of the Fiscal Council and an alternate. All shareholdershave the right to attend general meetings of shareholders.

 

TheBrazilian Corporate Law also provides that minority shareholders that holdeither (i) preferred shares representing at least 10% of the total sharecapital of a company or (ii) common shares representing at least 15% ofthe voting capital of a company, have the right to appoint one member and analternate to the Board of Directors. If no common or preferred shareholdermeets these 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.

 

*Changes in Rights of Shareholders*

 

Anychange with respect to the rights of holders of our common shares or preferredshares requires a shareholders’ meeting. Under the Brazilian Corporate Law, theproposed changes must be approved by a majority of the affected class. Certainchanges with respect to the rights of non-voting shares, including preferredshares, such as a change in payment or voting rights, may give rise to theexercise of redemption rights by the holders of the affected shares.

 

*Going Private Transactions and Delisting from the BM&FBovespa*

 

Ourdelisting, as a public company, must be preceded by a tender offer by ourcontrolling shareholders or ourselves for the acquisition of all our thenoutstanding shares, subject to the conditions below:

 

·                  the price offered for the shares under the public offering must be thefair value of those shares, as established in Brazilian Corporate Law; and

 

·                  shareholders holding more than two thirds of our float shares shall haveexpressly agreed to our decision to become a private company or accepted theoffer.

 

Accordingto Brazilian Corporate Law, a fair price shall be at least be equal to ourvaluation, as determined by one or more of the following valuation methods:book value, net book value assessed by market price, discounted cash flow,multiples, price of our shares in the market or any other valuation methodaccepted by the CVM. This price of the offer may be revised if challengedwithin 15 days of its publication by holders of at least 10% of our outstandingshares, by means of a request sent to our management that a specialshareholders` meeting be called to decide on whether to request a newvaluations under the same or different valuation method. Our shareholders thatrequest a new valuation and those who approve such request shall reimburse usfor incurred costs if the new valuation is lower than the challenged valuation.However, if the second valuation is higher, the offeror will have the option tocontinue the offer with the new price or quit the offer.

 

**Arbitration**

 

Pursuantto the Brazilian Corporate Law and related regulations, if provided for in acompany’s by-laws, disputes among shareholders will be subject to arbitration.Our by-laws currently do not provide for arbitration.

 

**Material Contracts**

 

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

 

110

----

Table of Contents

 

**Exchange Controls**

 

Thereare no restrictions on the ownership of preferred shares or common shares ofnon-financial institutions by legal entities domiciled outside Brazil. However,your right to convert dividend payments and proceeds from the sale of preferredshares or common shares into foreign currency and to remit such amounts outsideBrazil is subject to restrictions under foreign investment legislation whichgenerally requires, among other things, that you register the relevantinvestment with the Central Bank and the CVM.

 

Investmentsin the preferred shares through the holding of Preferred ADSs, or in the commonshares through the holding of Common ADSs, must be made pursuant to Annex V toCMN Resolution No. 1,289, as amended by CMN Resolution No. 1,927 alsoknown as the Annex V Regulations. Direct investments in the preferred sharesupon the cancellation of the Preferred ADSs, or in the common shares upon thecancellation of the Common ADSs, may be held by foreign investors under LawNo. 4,131 of September 3, 1962 or CMN Resolution No. 2,689 of January 26,2000, both of which effectively allow registered foreign investors to investsubstantially in any capital market instrument in Brazil and extend a favorabletax treatment to all foreign investors registered and qualified under CMNResolution No. 2,689, who are not resident in a tax haven, as defined byBrazilian tax laws.

 

UnderCMN Resolution No. 2,689, foreign investors may invest in almost allfinancial assets and engage in almost all transactions available in theBrazilian financial and capital markets, provided that certain requirements arefulfilled. In accordance with CMN Resolution No. 2,689, the definition offoreign investor includes individuals, legal entities, mutual funds and othercollective investment entities that are domiciled or headquartered abroad.

 

Securitiesand other financial assets held by CMN Resolution No. 2,689 investors mustbe registered or maintained in deposit accounts or in the custody of an entityduly licensed by the Central Bank or the CVM. In addition, any transfer of asecurity that is held pursuant to CMN Resolution No. 2,689 must be madethrough the stock exchanges or organized OTC markets licensed by the CVM,except for a transfer resulting from a corporate reorganization outside ofBrazil or occurring upon the death of a foreign investor by operation of law orwill.

 

Holdersof Preferred ADSs or Common ADSs who have not registered their investment withthe Central Bank could be adversely affected by delays in, or refusals togrant, any required government approval for conversions of payments made in *reais* and remittances abroad of theseconverted amounts.

 

TheAnnex V Regulations provide for the issuance of depositary receipts in foreignmarkets in respect of shares of Brazilian issuers. The Preferred ADSs have beenapproved under the Annex V Regulations by the Central Bank and the CVM, and theCommon ADSs have been approved by the CVM (since authorization from the CentralBank is no longer necessary).

 

Electroniccertificates of registration have been issued in the name of Citibank, N.A.,the depositary bank, with respect to the Preferred ADSs and the Common ADSs,and are maintained by Citibank Distribuidora de Títulos e Valores MobiliáriosS.A., the Brazilian custodian for the preferred shares and the common shares,on behalf of the depositary bank. These electronic certificates of registrationare registered through the Central Bank Information System. Pursuant to thecertificates of registration, the custodian and the depositary bank are able toconvert dividends and other distributions or sales proceeds with respect to thepreferred shares represented by Preferred ADSs and the common sharesrepresented by the Common ADSs into foreign currency and remit the proceedsoutside Brazil.

 

Inthe event that a holder of Preferred ADSs exchanges such Preferred ADSs forpreferred shares, or a holder of Common ADSs exchanges such Common ADSs forcommon shares, such holder will be entitled to continue to rely on thedepositary bank’s certificate of registration for five business days after theexchange. Thereafter, the holder may not be able to convert into foreigncurrency and remit outside Brazil the proceeds from the disposition of, ordistributions with respect to, the preferred shares or the common shares,unless the holder is a duly qualified investor under Resolution No. 2,689by registering with the CVM and the Central Bank and appointing arepresentative in Brazil. If not so registered, the holder will be subject toless favorable Brazilian tax treatment than a holder of Preferred ADSs orCommon ADSs. Regardless of qualification under Resolution No. 2,689,residents in tax havens are subject to less favorable tax treatment than otherforeign investors. See “—Taxation—Brazilian Tax Considerations.”

 

Undercurrent Brazilian legislation, the Federal Government may impose temporaryrestrictions of foreign capital abroad in the event of a serious imbalance oran anticipated serious imbalance of Brazil’s balance of payments. Forapproximately nine months in 1989 and early 1990, the Federal Government frozeall dividend and capital repatriations held by the Central Bank that were owedto foreign equity investors, in order to conserve Brazil’s foreign currencyreserves. These amounts were subsequently released in accordance with FederalGovernment directives. We cannot assure you that the Federal Government willnot impose similar restrictions on foreign reparations in the future.

 

111

----

Table of Contents

 

**Taxation**

 

Thefollowing summary contains a description of the material Brazilian and U.S.federal income tax consequences of the purchase, ownership and disposition ofpreferred shares, common shares, Preferred ADSs or Common ADSs by a UnitedStates person, as defined in section 7701(a)(30) of the Internal Revenue Codeof 1986, or the Code, or a holder that otherwise will be subject to U.S.federal income tax on a net income basis in respect of preferred shares, commonshares, Preferred ADSs or Common ADSs, which we refer to as a U.S. holder, butit does not purport to be a comprehensive description of all of the taxconsiderations that may be relevant to a decision to purchase preferred shares,common shares, Preferred ADSs or Common ADSs. In particular this summary dealsonly with U.S. holders that will hold preferred shares, common shares,Preferred ADSs or Common ADSs as capital assets and does not address the taxtreatment of U.S. holders that own or are treated as owning 10% or more of thevoting shares of the Company or that may be subject to special tax rules, suchas banks or other financial institutions, insurance companies, regulatedinvestment companies, dealers in securities or currencies, traders insecurities that elect to mark to market, “pass-through entities” such aspartnerships or persons that will hold preferred shares, common shares,Preferred ADSs or Common ADSs as part of a hedging transaction, constructivesale transaction, position in a “straddle” or a “conversion transaction” fortax purposes, and persons that have a “functional currency” other than the U.S.dollar. Moreover, this summary does not describe any implications under U.S.state or local law or the federal estate tax, gift tax or Medicare tax on netinvestment income.

 

Thesummary is based upon tax laws of Brazil and the United States as in effect onthe date hereof which are subject to change possibly with retroactive effect.Prospective purchasers of Preferred ADSs or Common ADSs are encouraged toconsult their own tax advisors as to the Brazilian, U.S. or other taxconsequences of the purchase, ownership and disposition of preferred shares,common shares, Preferred ADSs or Common ADSs, including, in particular, theeffect of any foreign, state or local tax laws.

 

Althoughthere is currently no income tax treaty in force between Brazil and the UnitedStates, the tax authorities of both countries have had discussions that mayculminate in such a treaty. No assurance can be given, however, as to whetheror when a treaty will enter into force or how it will affect the U.S. holdersof preferred shares, common shares, Preferred ADSs or Common ADSs.

 

*Brazilian Tax Considerations*

 

*General —*The following discussionsummarizes the main Brazilian material tax consequences of the acquisition,ownership and disposal of preferred shares, common shares, Preferred ADSs orCommon ADSs, as the case may be, by a holder that is not domiciled in Brazil, whichwe refer to as a non-Brazilian holder for purposes of Brazilian taxation. Inthe case of a holder of preferred shares or common shares, we assume theinvestment is registered with the Central Bank. The following discussion doesnot address all of the Brazilian tax considerations applicable to anyparticular non-Brazilian holder. Therefore, each non-Brazilian holder shouldconsult his or her own tax adviser concerning the Brazilian tax consequences ofan investment in our preferred shares, common shares, Preferred ADSs or CommonADSs.

 

*Taxation of Dividends —*Dividends paid by us,including stock dividends and other dividends paid in property to thedepositary in respect of the preferred shares or common shares, or to anon-Brazilian holder in respect of the preferred shares or common shares, arecurrently exempted from withholding tax in Brazil to the extent that thedividends are paid out ofprofitsgenerated as of January 1, 1996. Dividends relating to profits generatedprior to January 1, 1996 may be subject to Brazilian withholding tax atvarying rates, depending on the year the profits were generated.

 

*Payments of Interest on Capital —*LawNo. 9,249, dated as of December 26, 1995, as amended, permitsBrazilian corporations to make distributions to shareholders of interest onequity, or interest attributed to shareholders’ equity. These distributions maybe paid in cash. Such payments represent a deductibleexpense from the payor’s income tax and socialcontribution tax basis. This interest is limited to the daily pro ratavariation of the Federal Government’s long-term interest rate, as determined bythe Central Bank from time to time, and cannot exceed the greater of:

 

·                  50% of net income (after the social contribution on net profits andbefore the provision for corporate income tax, and the amounts attributable toshareholders as interest on net equity) for the period in respect of which thepayment is made; or

 

·                  50% of the sum of retained earnings and earnings reserves as of the dateof the beginning of the period in respect of which the payment is made.

 

Anypayment of interest on capital to shareholders (including holders of PreferredADSs in respect of preferred shares and Common ADSs in respect of commonshares) is subject to a withholding tax at a rate of 15%, or 25% if thenon-Brazilian holder is domiciled in a jurisdiction that does not impose incometax or where the maximum income tax rate is lower than 20% or where the

 

112

----

Table of Contents

 

local legislation imposes restrictions ondisclosing the shareholding composition or the ownership of the investment, ora Tax Haven Holder. These payments may be included, at their net value, as partof any mandatory dividend.

 

OnJune 24, 2008, Law No. 11,727 was enacted, which established theconcept of “privileged tax regime.” Under this new law, a “privileged taxregime” is a considered to apply to a jurisdiction that meets any of thefollowing requirements: (1) does not tax income or taxes income at amaximum rate lower than 20%; (2) grants tax advantages to a non-residententity or individual (a) without requiring substantial economic activityin the jurisdiction of such non-resident entity or individual or (b) tothe extent such non-resident entity or individual does not conduct substantialeconomic activity in the jurisdiction of such non-resident entity orindividual; (3) does not tax income generated abroad, or imposes tax onincome generated abroad at a maximum rate lower than 20%, or (4) restrictsthe ownership disclosure of assets and ownership rights or restricts disclosureabout the execution of economic transactions.

 

Althoughthe interpretation of the current Brazilian tax legislation could lead to theconclusion that the concept of “privileged tax regime” should apply only forthe purposes of Brazilian transfer pricing rules, it is unclear whether suchconcept would also apply to investments carried out in the Brazilian financialand capital markets for purposes of this law. There is no judicial guidance asto the application of Law No. 11,727 of June 24, 2008 and,accordingly, we are unable to predict whether the Brazilian Internal RevenueService or the Brazilian courts would decide that the “privileged tax regime”concept shall be applicable to deem a Non-Resident Holder as a Tax HavenResident when carrying out investments in the Brazilian financial and capitalmarkets. However, in the event that the “privileged tax regime” concept isinterpreted to be applicable to transactions carried out in the Brazilianfinancial and capital markets, this tax law would accordingly result in theimposition of taxation to a Non-Resident Holder that meets the privileged taxregime requirements in the same way applicable to a Tax Haven Resident.

 

Tothe extent that payments of interest on capital are included as part of amandatory dividend, we are required to distribute an additional amount toensure that the net amount received by shareholders, after payment of theapplicable withholding tax is at least equal to the mandatory dividend.

 

Distributionsof interest on net equity to foreign holders may be converted into U.S. dollarsand remitted outside Brazil, subject to applicable exchange controls, to theextent that the investment is registered with the Brazilian Central Bank.

 

We cannot assure you that our Boardof Directors will not determine that future distributions should be made bymeans of dividends or interest on net equity.

 

Taxationof Gains — According to Law No. 10,833/03, the gains recognized on adisposal of assets located in Brazil, such as our shares, by a non-Brazilianholder, are subject to withholding income tax in Brazil. This rule isapplicable regardless of whether the disposal is conducted in Brazil or abroadand/or if the disposal is made or not to an individual or entity resident ordomiciled in Brazil.

 

Asa general rule, capital gains realized as a result of a disposal transactionare the positive difference between the amount realized on the disposal of theasset and the respective acquisition cost.

 

Capitalgains realized by non-Brazilian holders on the disposal of shares sold on theBrazilian stock exchange (which includes the transactions carried out on theorganized over-the-counter market):

 

·                  are subject to the withholding income tax at a zero percent rate, whenrealized by a non-Brazilian holder that (i) has registered its investmentin Brazil before the Central Bank under the rules of the BrazilianMonetary Counsel , or a Registered Holder, and (ii) is not a Tax HavenHolder; and

 

·                  are subject to income tax at a rate of 15% with respect to gainsrealized by a non-Brazilian holder that is not a Registered Holder (including anon-Brazilian holder who qualifies under Law No. 4,131/62) and gainsearned by Tax Haven Holders that are Registered Holders. In this case, awithholding income tax of 0.005% shall be applicable and can be offset againstany income tax due on the capital gain.

 

Any other gains realized on the disposal of sharesthat are sold on the Brazilian stock exchange:

 

·                  are subject to income tax at a rate of 15% when realized by anynon-Brazilian holder that is not a Tax Haven Holder, no matter if a RegisteredHolder or not; and

 

·                  are subject to income tax at a rate of 25% when realized by a Tax HavenHolder, no matter if a Registered Holder or not.

 

113

----

Tableof Contents

 

Inthe cases above, if the gains are related to transactions conducted on theBrazilian non-organized over-the-counter market with intermediation, thewithholding income tax of 0.005% shall also be applicable and can be offsetagainst any income tax due on the capital gain.

 

Anyexercise of preemptive rights relating to shares will not be subject toBrazilian income tax. Gains realized by a non-Brazilian holder on the disposalof preemptive rights will be subject to Brazilian income tax according to thesame rules applicable to disposal of shares.

 

Therecan be no assurance that the current favorable tax treatment of RegisteredHolders will continue in the future.

 

*Sale of Preferred ADSs and Common ADSs by U.S. Holders to OtherNon-Residents in Brazil —*Pursuant to Section 26of Law No. 10,833, published on December 29, 2003, the sale ofproperty located in Brazil involving non-resident investors is subject toBrazilian income tax as of February 1, 2004. Our understanding is thatADSs do not qualify as property located in Brazil and, thus, should not besubject to the Brazilian withholding tax. Insofar as the regulatory normreferred to in Section 26 is recent and generic and has not been testedthrough the administrative or judicial courts, we are unable to assure thefinal outcome of such discussion.

 

Ifsuch argument does not prevail, it is important to mention that with respect tothe cost of acquisition to be adopted for calculating such gains, Brazilian lawhas conflicting provisions regarding the currency in which such amount must bedetermined. CEMIG’s Brazilian counsel’s view is that the capital gains shouldbe based on the positive difference between the cost of acquisition of thepreferred shares or common shares registered with the Brazilian Central Bank inforeign currency and the value of disposal of those preferred shares or commonshares in the same foreign currency. This view has been supported by a precedentissued by the Brazilian administrative court. However, considering that taxauthorities are not bound by such precedent, assessments have been issuedadopting the cost of acquisition in Brazilian currency.

 

*Gains on the Exchange ofPreferred ADSs for Preferred Shares or the Exchange of Common ADSs for CommonShares —*Althoughthere is no clear regulatory guidance, the exchange of ADSs for shares shouldnot be subject to Brazilian tax. Non-Brazilian holders may exchange PreferredADSs for the underlying preferred shares or Common ADSs for the underlyingcommon shares, sell the preferred shares or common shares on a Brazilian stockexchange and remit abroad the proceeds of the sale within five business daysfrom the date of exchange (in reliance on the depositary’s electronicregistration), with no tax consequences. Although there is no clear regulatoryguidance, the exchange of ADSs for shares should not be subject to Brazilianwithholding income tax.

 

Upon receipt of the underlyingpreferred shares in exchange for Preferred ADSs or the underlying common sharesin exchange for Common ADSs, non-Brazilian holders may also elect to registerwith the Central Bank the U.S. dollar value of such preferred shares or commonshares as a foreign portfolio investment under Resolution No. 2689/00,which will entitle them to the tax treatment referred above in connection with “U.S.market investors.”

 

Alternatively, the non-Brazilianholder is also entitled to register with the Central Bank the U.S. dollar valueof such preferred shares or common shares as a foreign direct investment underLaw 4,131/62, in which case the respective sale would be subject to the taxtreatment referred in the section “Taxation of Gains.”

 

*Gains on the Exchange ofPreferred Shares for Preferred ADSs or Common Shares for Common ADSs —*The deposit ofpreferred shares in exchange for the Preferred ADSs or common shares inexchange for the Common ADSs may be subject to Brazilian income tax on capitalgains if the amount previously registered with the Central Bank as a foreigninvestment in preferred shares or common shares or, in the case of other marketinvestors under Resolution No. 2,689, the acquisition cost of thepreferred shares or common shares, as the case may be, is lower than:

 

·                  the average price per preferred share or common share on the Brazilianstock exchange on which the greatest number of such preferred shares or commonshares were sold on the day of deposit; or

 

·                  if no preferred shares or common shares were sold on that day, theaverage price on the Brazilian stock exchange on which the greatest number ofpreferred shares or common shares were sold during the 15 preceding tradingsessions.

 

Thedifference between the amount previously registered, or the acquisition cost,as the case may be, and the average price of the preferred shares or commonshares, calculated as set forth above, is considered a capital gain subject toincome tax at a rate of 15% or 25% for Tax Haven Holders. Although there is noclear regulatory guidance, such taxation should not apply in case of Non-Resident Holders registered under Resolution No. 2,689/00,other than Tax Haven Residents.

 

*Taxation of Foreign Exchange Transactions —* Brazilian lawimposes a Tax on Foreign Exchange Transactions, or IOF/ Exchange tax, due onthe conversion of *reais*intoforeign currency and on the conversion of foreign currency into *reais.*Currently,

 

114

----

Table of Contents

 

IOF/Exchangeis imposed at a rate of 2% on the inflow of resources into Brazil forinvestments carried out by Non-Resident Holders in the Brazilian financial andcapital markets under regulations issued by the CMN.  The outflow of funds related to investmentscarried out by Non-Resident Holders in the Brazilian financial and capitalmarkets, as well as the remittance of dividends and interest on shareholders’equity  are subject to IOF/Exchange at a zero percent rate. Although it isnot clearly regulated, the conversion of *reais*into dollars for payment of dividends to holders of ADSs should also benefitfrom the zero percent IOF/Exchange rate.

 

*Tax on Transactions Involving Bonds and Securities.* Brazilian lawimposes a Tax on Transactions Involving Bonds and Securities, or IOF/Bonds Tax,including those carried out on a Brazilian stock exchange. The rate of IOFapplicable to transactions involving stocks (such as our preferred shares,Preferred ADSs, common shares and Common ADSs) is currently zero, although theMinister of Finance is permitted to increase such rate at any time up to 1.5%per day, but only in respect to future transactions.

 

*Other Brazilian Taxe*s —**SomeBrazilian states impose gift and inheritance tax on gifts or bequests made byindividuals or entities not domiciled or residing in Brazil to individuals orentities domiciled or residing within such states. There are no Brazilianstamp, issue, registration, or similar taxes or duties payable by holders ofpreferred shares, common shares, Preferred ADSs or Common ADSs.

 

*U.S. Tax Considerations*

 

Ingeneral, for U.S. federal income tax purposes, holders of ADRs evidencing ADSswill be treated as the beneficial owners of the common shares or preferredshares represented by those ADSs.

 

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

 

Ifdividends paid in *reais* areconverted into U.S. dollars on the day they are received by the U.S. holder orthe depositary bank, as the case may be, U.S. holders generally should not berequired to recognize foreign currency gain or loss in respect of the dividendincome. U.S. holders should consult their own tax advisors regarding thetreatment 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.

 

Dividendsgenerally will constitute foreign source income and generally will constitute “passivecategory income” or, in the case of certain U.S. holders, “general categoryincome,” for foreign tax credit purposes. In the event Brazilian withholdingtaxes are imposed on such dividends, such taxes may be treated as a foreignincome tax eligible, subject to generally applicable limitations and conditionsunder U.S. federal income tax law, for credit against a U.S. holder’s U.S.federal income tax liability (or at a U.S. holder’s election, may be deductedin computing taxable income). The calculation and availability of foreign taxcredits and, in the case of a U.S. holder that elects to deduct foreign taxes,the availability of deductions, involves the application of rules thatdepend on a U.S. holder’s particular circumstances. In the event Brazilianwithholding taxes are imposed, U.S. holders should consult their own taxadvisors regarding the availability of foreign tax credits with respect toBrazilian withholding taxes.

 

Distributionsto U.S. holders of additional shares of “common stock” or preemptive rightsrelating to such “common stock” with respect to their common shares or CommonADSs that are made as part of a pro rata distribution to all shareholders ofthe Company generally will not be treated as dividend income for U.S. federalincome tax purposes, but could result in additional U.S.-source taxable gainupon the sale of such additional shares or preemptive rights. Non-pro ratadistributions of such shares or rights generally would be includible in theU.S. holder’s gross income to the same extent and in the same manner asdistributions payable in cash. In that event, the amount of such distribution(and the basis of the new shares or preemptive rights so received) generallywill 

 

115

----

Table of Contents

 

equal the fair market value of the shares orpreemptive rights on the date of distribution. It is not entirely clear whetherthe preferred shares will be treated as “preferred stock” or “common stock” forthis purpose. If the preferred shares are treated as “common stock” for thispurposes the treatment above would apply to distributions of shares orpreemptive rights with respect to preferred shares or Preferred ADSs, On theother hand, if the preferred shares are treated as “preferred stock” adistribution of additional shares or preemptive rights would be includible ingross income to the same extent as a cash distribution whether or not suchdistribution is considered a pro rata distribution.

 

Aholder of shares or ADSs that is not a U.S. holder generally will not besubject to U.S. federal income or withholding tax on dividends received onshares or ADSs, unless such income is effectively connected with the conduct bythe holder of a trade or business in the United States.

 

*Qualified Dividend Income —* Notwithstanding the foregoing,certain dividends received by individual U.S. holders that constitute “qualifieddividend income” currently may be subject to a reduced maximum marginal U.S.federal income tax rate. Qualified dividend income generally includes, amongother dividends, dividends received during the taxable year from “qualifiedforeign corporations.” In general, a foreign corporation is treated as aqualified foreign corporation with respect to any dividend paid by thecorporation with respect to stock of the corporation that is readily tradableon an established securities market in the United States. For this purpose, ashare is treated as readily tradable on an established securities market in theUnited States if an ADR backed by such share is so traded.

 

Notwithstandingthis previous rule, dividends received from a foreign corporation that is apassive foreign investment company (as defined in section 1297 of the Code), orin either the taxable year of the corporation in which the dividend was paid orthe preceding taxable year will not constitute qualified dividend income. Inaddition, the term “qualified dividend income” will not include, among otherdividends, any (i) dividends on any share or ADS which is held by ataxpayer for 60 days or less during the 120-day period beginning on the datewhich is 60 days before the date on which such share or the shares backing theADS become ex-dividend with respect to such dividends (as measured undersection 246(c) of the Code) or (ii) dividends to the extent that thetaxpayer is under an obligation (whether pursuant to a short sale or otherwise)to make related payments with respects to positions in substantially similar orrelated property. Moreover, special rules apply in determining a taxpayer’sforeign tax credit limitation under section 904 of the Code in the case ofqualified dividend income.

 

IndividualU.S. holders should consult their own tax advisors to determine whether or notamounts received as dividends from us will constitute qualified dividend incomesubject to a reduced maximum marginal U.S. federal income tax rate and, in suchcase, the effect, if any, on the individual U.S. holder’s foreign tax credit.

 

*Taxation of Capital Gains —*Deposits and withdrawals ofshares by U.S. holders in exchange for ADSs will not result in the realizationof gain or loss for U.S. federal income tax purposes.

 

Gainor loss realized by a U.S. holder on the sale, redemption or other dispositionof shares or ADSs will be subject to U.S. federal income taxation as capitalgain or loss in an amount equal to the difference between such U.S. holder’sbasis in the 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 ofshares or ADSs, including gain that arises because the U.S. holder’s basis inthe shares or ADSs has been reduced because a distribution is treated as areturn of capital rather than as a dividend, generally will be treated as U.S.source income for U.S. foreign tax credit purposes.

 

Ifa Brazilian withholding tax or income tax is imposed on the sale or dispositionof shares or ADSs as described in “—Taxation—Brazilian Tax Considerations,” theamount realized by a U.S. holder will include the gross amount of the proceedsof such sale or disposition before deduction of the Brazilian withholding taxor income tax if applicable. The availability of U.S. foreign tax credits forthese Brazilian taxes and any Brazilian taxes imposed on distributions that donot 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, shares or ADSs.

 

Aholder of shares or ADSs that is not a U.S. holder will not be subject to U.S.federal income or withholding tax on gain realized on the sale of 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.

 

*Information Reporting and Backup Withholding —*Informationreporting requirements will generally apply to U.S. holders of ADSs and U.S.holders will be required to comply with applicable certification procedures toestablish that they are not subject to back up withholding. A holder of ADSsthat is not a U.S. holder may be required to comply with applicablecertification procedures to

 

116

----

Table of Contents

 

establish that they are not United Statespersons in order to avoid the application of U.S. information reportingrequirements and backup withholding tax.

 

**Dividends and Paying Agents**

 

Wepay dividends on preferred shares and common shares in the amounts and in themanner set forth under “Item 8. Financial Information—Dividend Policy andPayments.” We will pay dividends in respect of preferred shares represented byPreferred ADSs or common shares represented by Common ADSs to the custodian forthe depositary bank, as record owner of the preferred shares represented byPreferred ADSs or the common shares represented by Common ADSs. As promptly aspracticable after receipt of the dividends we pay through Citibank N.A. to thecustodian, it will convert these payments into U.S. dollars and remit suchamounts to the depositary bank for payment to the holders of Preferred ADSs orCommon ADSs in proportion to individual ownership.

 

**Documents on Display**

 

Weare subject to the informational requirements of the Securities Exchange Act of1934, as amended, or the Exchange Act. In accordance with these requirements,we file reports and other information with the SEC. These materials, includingthis annual report and the accompanying exhibits, may be inspected and copiedat the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580,Washington, D.C. 20549. Copies of the materials may be obtained from the SEC’sPublic Reference Room at prescribed rates. The public may obtain informationon the operation of the SEC’s Public Reference Room by calling the SEC inthe 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**

 

Wehave insurance policies to cover damages to our headquarters building and tothe turbines, generators and transformers of our major power plants andsubstations caused by fire and risks such as equipment failures. We also haveinsurance policies to cover damages to aircrafts used in connection to ouroperations. We do not have general third party liability insurance coveringaccidents and have not solicited bids related to this type of insurance.However, we may contract for this type of insurance in the future. In addition,we have not solicited bids for, nor do we carry, insurance coverage for majorcatastrophes affecting our facilities such as earthquakes and floods or for operatingsystem failures. We do not have insurance coverage for business interruptionrisk, which means damages we suffer and consequential damages suffered by ourconsumers resulting from an interruption in power distribution are generallynot covered by our insurance and we may be subject to significant relatedlosses. See “Item 3. Key Information—Risk Factors—Risks Relating to CEMIG—Weoperate without general third party liability and catastrophe insurancepolicies.”

 

Webelieve that, since we have contracted for fire and operational risk insurance,our insurance coverage will be at a level that is customary in Brazil for thetype of businesses in which we are engaged.

 

**Difficultiesof Enforcing Civil Liabilities Against Non-U.S. Persons**

 

We are a state-controlled mixedcapital company established under the laws of Brazil. All of our executiveofficers and directors presently reside in Brazil. In addition, substantiallyall of our assets are located in Brazil. As a result, it will be necessary forholders of Preferred ADSs or Common ADSs to comply with Brazilian law in orderto obtain an enforceable judgment against our executive officers or directorsor our assets. It may not be possible for holders of Preferred ADSs or CommonADSs to effect service of process within the United States upon our executiveofficers and directors, or to realize in the United States upon judgmentsagainst these persons obtained in U.S. courts based upon civil liabilities ofthese persons, including any judgments based upon U.S. federal securities laws,to the extent these judgments exceed these persons’ U.S. assets. We have beenadvised by Brazilian counsel, Machado, Meyer, Sendacz e Opice Advogados, thatjudgments of U.S. courts for civil liabilities based upon the federal securitieslaws of the United States may be, subject to the requirements described below,enforced in Brazil. A judgment against us, or the persons described aboveobtained outside Brazil without reconsideration of the merits, is subject toconfirmation by the Brazilian Superior Court of Justice. That confirmation willoccur if the foreign judgment:

 

·                  fulfills all formalitiesrequired for its enforceability under the laws of the country where the foreignjudgment is granted;

 

·                  is issued by a competent courtafter proper service of process is made in accordance with Brazilian law;

 

·                  is not subject to appeal;

 

·                  is for the payment of a sumcertain;

 

117

----

Table of Contents

 

·                  is authenticated by a Brazilianconsular officer in the country where the foreign judgment is issued and isaccompanied by a sworn translation into Portuguese; and

 

·                  is not contrary to Braziliannational sovereignty, public policy or public morality.

 

Wecannot assure you the confirmation process described above will be conducted ina timely manner or that Brazilian courts would enforce a monetary judgment forviolation of the United States securities laws with respect to the PreferredADSs and the preferred shares represented by the Preferred ADSs or the CommonADSs and the common shares represented by the Common ADSs.

 

Wewere further advised by respective Brazilian counsel that:

 

·                  original actions based on the federal securities laws of the UnitedStates may be brought in Brazilian courts and that, subject to Brazilian publicpolicy and national sovereignty, Brazilian courts will enforce liabilities insuch actions against us and our officers; and

 

·                  the ability of a judgment creditor or the other persons named above tosatisfy a judgment by attaching our assets or those of the selling shareholdersis limited by provisions of Brazilian law.

 

Aplaintiff (whether Brazilian or non-Brazilian) residing outside Brazil duringthe course of litigation in Brazil must provide a bond to guarantee court costsand legal fees if the plaintiff owns no real property in Brazil that couldsecure such payment. The bond must have a value sufficient to satisfy thepayment of court fees and defendant’s attorney fees, as determined by a judgein Brazil. This requirement does not apply to a proceeding to enforce a foreignjudgment which has been confirmed by the Brazilian Superior Court of Justice.

 

**Item 11.****   ****Quantitative and QualitativeDisclosures about Market Risk**

 

Weare exposed to market risk from changes in foreign currency exchange rates andinterest rates.

 

Weare exposed to foreign exchange risk because certain of our loans andfinancings are denominated in currencies (primarily the U.S. dollar) other thanthe currency in which we earn revenues (the *real*)*.*Despite the fact that our electricitypurchases from Itaipu, which represented R$865 million in 2009, are denominatedin U.S. dollars, the related foreign exchange risk is no longer reflected inour operating revenues and operating expenses due to rate legislation changesin 2001 which allow electricity utilities such as us to record exchange ratelosses related to Itaipu purchases as deferred regulatory assets. See “Item 5.Operating and Financial Review and Prospects—Critical Accounting Estimates.”

 

**Exchange Rate Risk**

 

AtDecember 31, 2009, approximately 2.0% of our outstanding indebtedness, orR$190 million, was denominated in foreign currencies, of which approximately90.0%, or R$171 million, was denominated in U.S. dollars. We do not havesubstantial revenues denominated in any foreign currencies and, due toregulations that require us to keep excess cash on deposit in *real*-denominated accounts at Brazilian banks, we do not havemonetary assets denominated in foreign currencies.

 

In2009, we used financial instruments such as interest rate swaps to hedge ourforeign exchange rate exposure. The purpose of the swaps was to reduce ourexposure on the original interest rate of certain financing from an interestrate calculated based on the U.S. dollar/*real*exchange rate to an interest rate calculated based on the CDI rate.  See Notes 2(d), 14, 22, 24 and 25 to ourconsolidated financial statements.

 

In2010, the potential loss we would experience in the event of a hypothetical 20%depreciation of the *real* against the U.S. dollar and other foreigncurrencies would be approximately R$36 million related principally toloans and financing and primarily due to an increase in our *real*-denominated interest expense, which would be reflectedon our income statement. In 2010, a hypothetical 20% depreciation of the*real* against the U.S. dollar would result in an additional annualcash outflow of approximately R$241.8 million, reflecting the increased cost in*reais* of servicing foreigncurrency-denominated indebtedness from loans, financings and debentures andincreased purchasing power relating to Itaipu. This sensitivity analysisassumes a simultaneous unfavorable 20% fluctuation in each of the exchangerates affecting the foreign currencies in which our indebtedness, the relatedinterest expense and the expenses relating to the purchase of energy fromItaipu are denominated. This sensitivity analysis also assumes that theunfavorable fluctuation in the exchange rate affecting the purchase of energyfrom Itaipu would affect the annual cash payments but would not affect theexpense recorded on the statement of operations, since the additional currencyexchange expense would be recorded as a deferred regulatory asset.

 

118

----

Table of Contents

 

Thetables below provide summary information regarding our exposure to exchangerate risk as of December 31, 2009:

 
| ** **                                    | ** ** | **R$  (Million)** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| U.S. Dollar                                   |       |              |       |
| Financing                                     |       | 171               |       |
| Plus Contracted derivative instruments        |       | 8                 |       |
|                                          |       | 179               |       |
| Other Currencies                              |       |              |       |
| Financing                                     |       | 19                |       |
| Net liabilities exposed to exchange rate risk |       | 198               |       |

 

**Interest Rate Risk**

 

AtDecember 31, 2009, we had R$9,277 million in loans and financingoutstanding, of which approximately R$8,770 million bore interest at floatingrates. Of this R$8,770 million, R$8,734 million is subject to monetaryrestatement through the application of inflation indices established by theFederal Government, principally the IGP-M, and R$36 million is subjectprincipally to LIBOR.

 

AtDecember 31, 2009, we had liabilities, net of other assets, that boreinterest at floating rates in the amount of R$2,812 million. These assetsconsisted mainly of our account receivable from the State Government anddeferred regulatory assets, partially offset by CCEE obligations, bearinginterest at rates tied to IGP-DI and SELIC, respectively, as summarized in thetables below. A hypothetical, instantaneous and unfavorable change of 100 basispoints in interest rates applicable to floating rate financial assets andliabilities held at December 31, 2009 would result in a potential loss ofR$28.12 million to be recorded as a financial expense in our consolidatedfinancial statements.

 

Total Debt Portfolio

 
| ** **                   | ** ** | **R$****(Million)** | ** ** |
|------------------------------|------------|---------------------|------------|
| Floating rate debt:          |       |                |       |
| *Real*-denominated           |       | 8,734               |       |
| Foreign currency-denominated |       | 36                  |       |
|                         |       | 8,770               |       |
| Fixed rate debt:             |       |                |       |
| Foreign currency-denominated |       | 154                 |       |
|                         |       |                |       |
| Total                        |       | 8,924               |       |

 
| ** **                                                                          | ** ** | **Total Portfolio**            | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                          | ** ** | **Floating Rate  (R$million)** | ** ** |
| Assets:                                                                             |       |                                |       |
| Cash and cash equivalents                                                           |       | 3,811                               |       |
|                                                                                |       |                                |       |
| Account receivable from State Government                                            |       | 1,824                               |       |
| Deferred regulatory assets                                                          |       | 323                                 |       |
| Total                                                                               |       | 5,958                               |       |
|                                                                                |       |                                |       |
| Liabilities:                                                                        |       |                                |       |
|                                                                                |       |                                |       |
| Account payable to suppliers-payment to generator  for energy purchased on the CCEE |       |                                |       |
| Financings (Floating Rate)                                                          |       | (8,770                              | )          |
| Derivative instruments (1)                                                          |       | —                              |       |
| Total liabilities                                                                   |       | (8,770                              | )          |
|                                                                                |       |                                |       |
| Total                                                                               |       | (2,812                              | )          |

 

----

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

 

119

----

Table ofContents

 

**Item 12.****   ****Description of Securities Otherthan Equity Securities**

 

**American Depositary Shares**

 

Citibank, N.A. serves as the depositary (the “Depositary”)for both our Common ADSs and Preferred ADSs. Holders of ADSs, any person or entity having a beneficial interestderiving from the ownership of the ADSs, and persons depositing shares orsurrendering ADSs for cancellation and withdrawal of Deposited Securities (asdefined in the Deposit Agreements) are required to pay to the Depositarycertain fees and related charges as identified below.

 

The fees associated with our Common ADSs areas follows:

 
| **Service**                                                                                                                                                                         | ** ** | **Rate**                                                            | ** ** | **By Whom Paid**                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| (1) Issuance  of Common ADSs upon deposit of common shares (excluding issuances as a result  of distributions described in paragraph (4) below).                          |       | Up  to $5.00 per 100 Common ADSs (or fraction thereof) issued.      |       | Person  depositing common shares or person receiving Common ADSs.                                                                         |
| (2) Delivery  of Deposited Securities, property and cash against surrender of Common ADSs.                                                                                     |       | Up  to $5.00 per 100 Common ADSs (or fraction thereof) surrendered. |       | Person  surrendering Common ADSs for purpose of withdrawal of Deposited Securities or  person to whom Deposited Securities are delivered. |
| (3) Distribution  of cash dividend or other cash distributions (*i.e.*  sale of rights and other entitlements).                                                                |       | Up  to $2.00 per 100 Common ADSs (or fraction thereof) held.        |       | Person  to whom distribution is made.                                                                                                     |
| (4) Distribution  of Common ADSs pursuant to (i) stock dividends or other free stock  distributions, or (ii) exercise of rights to purchase additional Common  ADSs. |       | Up  to $5.00 per 100 Common ADSs (or fraction thereof) issued.      |       | Person  to whom distribution is made.                                                                                                     |
| (5) Distribution  of securities other than Common ADSs or rights to purchase additional Common  ADSs (*i.e.*spin off shares).                                                  |       | Up  to $5.00 per 100 Common ADSs (or fraction thereof) issued.      |       | Person  to whom distribution is made.                                                                                                     |
| (6) Transfer  of ADRs.                                                                                                                                                         |       | $1.50  per certificate presented for transfer.                      |       | Person  presenting certificate for transfer.                                                                                              |

 

The fees associated with our Preferred ADSsare as follows:

 
| **Service**                                                                                                                                             | ** ** | **Rate**                                                                                                                                                                                                                                                                                   | ** ** | **By Whom Paid**                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|
| (1) Issuance  of Preferred ADSs upon deposit of preferred shares (excluding issuances  contemplated by paragraphs (3)(b) and (5) below). |       | Up  to $5.00 per 100 Preferred ADSs (or fraction thereof) issued.                                                                                                                                                                                                                          |       | Person  for whom deposits are made or person receiving Preferred ADSs. |
| (2) Delivery  of Deposited Securities, property and cash against surrender of Preferred  ADSs.                                                     |       | Up  to $5.00 per 100 Preferred ADSs (or fraction thereof) surrendered.                                                                                                                                                                                                                     |       | Person  surrendering Preferred ADSs or making withdrawal.              |
| (3) Distribution  of (a) cash dividend or (b) Preferred ADSs pursuant to stock  dividends (or other free distribution of stock).         |       | No  fee, so long as prohibited by the exchange upon which the Preferred ADSs are  listed. If the charging of such fee is not prohibited, the fees specified in  (1) above shall be payable in respect of a distribution of Preferred  ADSs pursuant to stock dividends (or other free |       | Person  to whom distribution is made.                                  |

 

120

----

Table of Contents

 
|                                                                                        |   | distribution  of stock) and the fees specified in (4) below shall be payable in  respect of distributions of cash. |   |                                  |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (4) Distribution  of cash proceeds (i.e., upon sale of rights and other entitlements). |   | Up  to $2.00 per 100 Preferred ADSs (or fraction thereof) held.                                                         |   | Person  to whom distribution is made. |
| (5) Distribution  of Preferred ADSs pursuant to exercise of rights.                    |   | Up  to $5.00 per 100 Preferred ADSs (or fraction thereof) issued.                                                       |   | Person  to whom distribution is made. |

 

**Direct and indirect depositary payments**

 

Wehave an agreement with the Depositary to reimburse us, up to a limited amount,for certain expenses in connection with our ADR programs, including listingfees, legal and accounting expenses, proxy distribution costs and investorrelation related expenses.  Thesereimbursements for the year ended December 31, 2009 totaled approximatelyUS$ 3.1 million.

 

**PART II**

 

**Item 13.****   ****Defaults, Dividend Arrearages andDelinquencies**

 

Certainof CEMIG’s loans and financing agreements contain covenants that require us tomaintain financial ratios, calculated in accordance with Brazilian CorporateLaw. As of December 31, 2009, we were not in compliance with somecovenants, such as:

 

·                  the Debt /EBITDA ratio, contained in a credit instrument among Cemig Distribution and Santander (originally ABNAmro Bank). Such ratio is required to be less than or equal to 2.5, and as of December 31,2009, the ratio was 2.8, for both Cemig Distributionand CEMIG (asguarantor).  Cemig Distributionand CEMIG have obtaineda waiver from Santander.

·                  theDebt/(Shareholders’ equity + Debt) ratio, contained in credit instruments among Cemig Generation andTransmission and Banco Itaú BBA and Banco BNP Paribás. Such ratio is requiredto be less than or equal to 53%, and as of December 31, 2009, the ratiowas 61%. Cemig Generation andTransmission has obtained a waiver from the creditors that are parties to theagreements.

·                  the Short-termDebt/EBITDA ratio,  contained in creditinstruments among Cemig Generation andTransmission and Banco ItaúBBA. Such ratio is required to be less than or equalto 90%, and as of December 31, 2009, the ratio was 143% for Cemig Generation and Transmission and 115% for CEMIG (as guarantor). Cemig Generation andTransmission and CEMIG have obtaineda waiver from the Banco ItaúBBA.

·                  the CapitalExpenditure/EBITDA ratio,  contained incredit instruments among Cemig Distributionand Banco ItaúBBA. Such ratio is required to be less than or equal to 60%, andas of December 31, 2009, the ratio was 91%. Cemig Distributionhas obtained a waiver from Banco ItaúBBA.

 

Allthe obtained waivers affirm that the respective creditors will not exercisetheir rights to demand either accelerated or immediate payment of the totalamount due until December 31, 2010.

 

**Item 14.****   ****Material Modifications to theRights of Security Holders and Use of Proceeds**

 

Notapplicable.

 

**Item 15.****   ****Controls and Procedures**

 

**(a)****                                 ****Evaluationof Disclosure Controls and Procedures**

 

OurExecutive Board, including our Chief Executive Officer, or CEO, and ChiefFinancial and Investor Relations Officer, or CFO, evaluated the effectivenessof our disclosure controls and procedures, and concluded that onDecember 31, 2009, these disclosure controls and procedures were effectiveto provide reasonable assurance that information required to be disclosed inour filings and submissions under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) accumulated and communicated to ourmanagement, including our CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.

 

**(b)****                                 ****Management’sAnnual Report on Internal Control over Financial Reporting**

 

OurExecutive Board, including our CEO and CFO, is responsible for establishing andmaintaining effective internal controls over financial reporting.

 

121

----

Tableof Contents

 

Ourinternal controls over financial reporting include policies and procedures thatwere implemented to provide reasonable assurance as to (i) the reliabilityof the recording accounting and financial information; (ii) thepreparation of accounting records in accordance with U.S. GAAP; (iii) theprocessing of payments and receipts in accordance with managementauthorization; and (iv) the timely detection of inappropriateacquisitions, and the disposal or allocation of material assets. We emphasizethat due to their inherent limitations, the possibility exists that theseactions may not prevent or detect misstatements. Also, projections of anyevaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may decline.

 

Ourmanagement evaluated the effectiveness of our internal controls over financialreporting at December 31, 2009, based on the criteria established in theIntegrated Internal Control Framework specified by the Committee ofSponsoring Organizations of the Treadway Commission, or COSO, and concludedthat, for the year ended December 31, 2009, our system of internalcontrols over financial reporting is effective.

 

TheCompany’s independent registered public accounting firm which audited ourconsolidated financial statements for the year ended December 31, 2009,KPMG Auditores Independentes, has audited the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2009 andissued an attestation report, which is included below.

 

*The Ethics Committee*

 

OurEthics Committee was established on August 12, 2004, and is made up ofthree permanent members and three alternate members. It is responsible for themanagement, dissemination and updating of the Code of Professional Conduct.

 

TheCommittee receives and investigates all reports of violation of the ethicalprinciples and standards of conduct, provided they are presented in a writtendocument signed by the interested party and addressed to: CEMIG, Av. Barbacena1200, SA/17th Floor/B2. The Committee may also be contacted by e-mailcomissaodeetica@cemig.com.br.

 

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

 

**(c)           Attestation Report of the RegisteredPublic Accounting Firm**

 

**Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders ofCompanhia Energética de Minas Gerais — CEMIG:

 

Wehave audited Companhia Energética de Minas Gerais — CEMIG (collectively, “theCompany”)’s internal control over financial reporting as of December 31,2009, based on criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Company’s management isresponsible for maintaining effective internal control over financialreporting, and for its assertion of the effectiveness of internal control overfinancial reporting, included in the accompanying *Management’sAnnual Report on Internal Control over Financial Reporting*. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States of America). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

ACompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith U.S. generally accepted accounting principles. A Company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in

 

122

----

Table ofContents

 

accordancewith U.S. generally accepted accounting principles*,*andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, Companhia Energética de Minas Gerais — CEMIG maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2009, based on the criteria established in *Internal Control — Integrated Framework* issued by COSO.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States of America), the consolidated balancesheets of Companhia Energética de Minas Gerais — CEMIG and subsidiaries asof December 31, 2009 and 2008, and the related consolidated statements ofoperations and comprehensive income, changes in shareholders’ equity and comprehensiveincome, and cash flows for each of the years in the three-year period endedDecember 31, 2009, and our report dated June 28, 2010 expressed anunqualified opinion on those consolidated financial statements.

 

KPMG Auditores Independentes

 

/s/ KPMG Auditores Independentes

 

Belo Horizonte, Brazil

June 28, 2010

 

**(d)           Changes in Internal Control overFinancial Reporting**

 

Therehas been no change in our internal control over financial reporting during theyear ended December 31, 2009 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

OurFiscal Council acts as our audit committee for purposes of the Sarbanes-OxleyAct of 2002. Under Section 10A-3 of the SEC rules on Audit Committeesof listed companies, non-U.S. issuers are permitted not to have a separateAudit Committee made up of independent members if there is a Fiscal Councilestablished and chosen in accordance with the legal rules of its origincountry, expressly requiring or allowing that such council follow certainobligations. Also in accordance with this exemption, a Fiscal Council mayexercise the obligations and responsibilities of an Audit Committee of theUnited States up to the limit permitted by Brazilian law. The financial expertsof our Fiscal Council are Luiz Otávio Nunes West and Ari Barcelos da Silva.

 

**Item 16B. Code of Ethics**

 

Wehave adopted a code of ethics, as defined in Item 16B of Form 20-F underthe Exchange Act. Our code of ethics applies to our Chief Executive Officer,Chief Financial and Investor Relations Officer and persons performing similarfunctions as well as to our directors and other officers and employees. Ourcode of ethics was filed with the SEC as Exhibit 11 to our Annual Reporton Form 20-F for the fiscal year ended December 31, 2003, and is alsoavailable on our website at www.cemig.com.br. If we amend the provisions of ourcode of ethics that apply to our Chief Executive Officer, Chief Financial Officerand persons performing similar functions, or if we grant any waiver of suchprovisions, we will disclose such amendment or waiver within five business daysfollowing the date of the amendment or waiver on our web site atwww.cemig.com.br.

 

**Item 16C. Principal AccountantFees and Services**

 

**Audit and Non-Audit Fees**

 

Thefollowing table summarizes the aggregate fees billed to us by KPMG AuditoresIndependentes during the fiscal years ended December 31, 2009 and 2008:

 
| ** **         | ** ** | **Year ended December 31,**   | ** ** |
|--------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(thousands of reais)** | ** ** |
| Audit fees         |       | 1,688                              |       | 1,005 |   |
| Tax fees           |       | 199                                |       | 82 |   |
| Audit-related fees |       | —                             |       | 280 |   |
| Total fees         |       | 1,887                              |       | 1,367 |   |

 

123

----

Table of Contents

 

*Audit fees—*Audit fees in the abovetable are the aggregate fees billed by KPMG Auditores Independents in 2009 and2008, in connection with the audit of our annual financial statements preparedin accordance with the accounting practices adopted in Brazil and the UnitedStates and the review of our quarterly statutory financial statements.

 

*Tax Fees—*Tax fees are fees forprofessional services in relation to tax return reviews (tax compliance).

 

*Audit-Related Fees—*Audit-related fees are fordiagnostic services in connection with the implementation of the IFRS.

 

**Audit Committee Pre-Approval Policies and Procedures**

 

OurFiscal Council currently serves as our audit committee for purposes of theSarbanes-Oxley Act of 2002. However, as required by Brazilian legislation, wehave adopted pre-approval policies and procedures by which all audit andnon-audit services provided by external auditors must be approved by the Boardof Directors. Any service proposals submitted by external auditors need to bediscussed and approved by the Board of Directors during its meetings. Once theproposed service is approved, we formalize the engagement of services. Theapproval of any audit and non-audit services to be provided by our externalauditors is specified in the minutes of our Board of Directors.

 

**Item 16D.****Exemptions from the Listing Standards for Audit Committees**

 

We are relying on the general exemption from thelisting standards relating to audit committees contained in Rule 10A-3(c)(3) underthe Exchange Act. We have a Fiscal Council that carries out the functions of anaudit committee of the United States to the extent permitted under Brazilianlaw. Brazilian law requires our Fiscal Council to be separate from our board ofdirectors, and members of our Fiscal Council are not elected by ourmanagement.  Brazilian law providesstandards for the independence of our Fiscal Council from our management. OurFiscal Council, in accordance with its charter, makes recommendations to ourboard of directors regarding the appointment, retention and oversight of thework of any registered public accounting firm engaged for the purpose ofpreparing or issuing an audit report or performing other audit, review orattest services for our company, as Brazilian law requires that our board ofdirectors appoint, retain and oversee the work of our independent publicaccountants.

 

Wedo not believe that our reliance on this general exemption will materiallyaffect the ability of our Fiscal Council to act independently and to satisfythe other requirements of the listing standards relating to audit committeescontained in Rule 10A-3 under the Exchange Act.

 

**Item 16E. Purchases of EquitySecurities by the Issuer and Affiliated Purchasers**

 

Not applicable.

 

**Item 16F.****Change in Registrant’s Certifying Accountant**

 

Not applicable.

 

**Item 16G.****Corporate Governance**

 

**Corporate Governance Differences from NYSE Practices**

 

OnNovember 4, 2003, the New York Stock Exchange, or NYSE, established newcorporate governance rules. Under the rules, foreign private issuers aresubject to a more limited set of corporate governance requirements than U.S.domestic issuers. Under these rules, we are required to set forth in our annualreport to shareholders a description of the significant differences between CEMIG’scorporate governance practices and those that would apply to a U.S. domesticissuer under the NYSE corporate governance rules. The following tablesummarizes these differences.

 

124

----

Table of Contents

 
| **Section**          | ** ** | **NYSE Corporate Governance Rule for U.S.  Domestic Issuers**                                                                                                                                                                                                                        | ** ** | **Our Approach**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 303A.01              |       | A  listed company must have a majority of independent directors. “Controlled companies”  are not required to comply with this requirement.                                                                                                                                      |       | Under  Section 303A of the rules of the New York Stock Exchange,  “controlled company” is taken to include a company in which more than 50% of  the voting power is held by one individual, a group or another company. Since  50.97% of the voting stock of CEMIG is held by the State of Minas Gerais, it  is considered to be a controlled company. Therefore, this requirement  currently does not apply to CEMIG. Nonetheless, the majority of the members  of CEMIG’s Board of Directors are independent members.                   |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.03              |       | The  non-management directors of a listed company must meet at regularly scheduled  executive sessions without management.                                                                                                                                                                |       | The  non-management directors of CEMIG do not meet at regularly scheduled  executive sessions without management.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.04              |       | A  listed company must have a nominating/corporate governance committee composed  entirely of independent directors, with a written charter that covers certain  minimum specified duties. “Controlled companies” are not required to comply  with this requirement.            |       | As  a controlled company, CEMIG is not be required to have a  nominating/governance committee.

 

Nonetheless,  CEMIG has a Corporate Governance Committee, composed of dependent and  independent directors, and its responsibilities are clearly defined in the  internal regulations of the Board of Directors.                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.05              |       | A  listed company must have a compensation committee composed entirely of  independent directors, with a written charter that covers certain minimum  specified duties. “Controlled companies” are not required to comply with this  requirement.                               |       | As  a controlled company, CEMIG would not be required to comply with the  compensation committee requirements as if it were a U.S. domestic issuer.  CEMIG does not have a compensation committee.                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.06  and 303A.07 |       | A  listed company must have an audit committee with a minimum of three  independent directors that satisfy the independence requirements of  Rule 10A-3 under the Securities Exchange Act of 1934, as amended, with a  written charter that covers certain minimum specified duties. |       | CEMIG  exercised its prerogative under SEC Rule 10A-3 and the Sarbanes Oxley  Act of 2002, which allow non U.S. issuers not to have an Audit Committee. Our  Fiscal Council carries out the functions of an Audit Committee of the United  States up to the limit permitted by Brazilian law.

 

CEMIG’s  Fiscal Council is a permanent body, responsible, principally, for inspection  and supervision of the activities of the management and for verifying the  managers’ compliance with their duties under the law and under the bylaws. |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.08              |       | Shareholders  must be given the opportunity to vote on all equity-compensation plans and  material revisions thereto, with limited exemptions set forth in the NYSE  rules.                                                                                                               |       | Under  Brazilian Corporate Law, shareholder preapproval is required for the adoption  of equity compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.09              |       | A  listed company must adopt and disclose corporate governance guidelines that  cover certain minimum specified subjects.                                                                                                                                                                 |       | CEMIG’s  listing on BM&FBovespa is at Corporate Governance Level 1, and CEMIG is  thus obliged to comply with the rules contained in those related  regulations.

 

In  addition, CEMIG’s Manual for Disclosure and Use of Information, its  Securities Trading Policy, the Internal Regulations of its Board of  Directors, and its Code of Ethics outline important rules of corporate  governance which orient its management.                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 303A.12              |       | Each  listed company Chief Executive Officer must certify to the NYSE each year  that he or she is not aware of any violation by the company of NYSE corporate  governance listing standards.                                                                                             |       | CEMIG’s  Chief Executive Officer will promptly notify the NYSE in writing after any  executive officer of CEMIG becomes aware of any material non-compliance with  any applicable provisions of the NYSE corporate governance rules.                                                                                                                                                                                                                                                                                                                          |

 

125

----

Table of Contents

 

**PART III**

 

**Item 17. Financial Statements**

 

Notapplicable.

 

**Item 18.****Financial Statements**

 

Referenceis made to pages F-1 through F-71 hereof.

 

Thefollowing financial statements are filed as part of this annual report onForm 20-F:

 

·                  Report of KPMG Auditores Independentes for the years 2009, 2008 and 2007

 

·                  Audited Consolidated Balance Sheets as of December 31, 2009 and2008

 

·                  Audited Consolidated Statements of Operations and Comprehensive Income(Loss) for the years ended December 31, 2009, 2008 and 2007

 

·                  Audited Consolidated Statements of Changes in Shareholders’ Equity forthe years ended December 31, 2009, 2008 and 2007

 

·                  Audited Consolidated Statements of Cash Flows for the years endedDecember 31, 2009, 2008 and 2007

 

·                  Notes to the Consolidated Financial Statements

 

**Item 19.****Exhibits**

 

Thefollowing documents are included as exhibits to this annual report:

 
| **Exhibit  Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                   |       | Corporate  by-laws of CEMIG, as amended and in effect since April 29, 2010.                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1                 |       | Second  Amended and Restated Deposit Agreement, dated as of August 10, 2001, by  and among us, Citibank, N.A., as depositary, and the holders and beneficial  owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference  to the Registration Statement on Form F-6 relating to the ADSs filed on  August 20, 2001 (File No. 333-13826)).                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.2                 |       | Shareholders’  Agreement, dated June 18, 1997, between the State Government and  Southern, relating to the rights and obligations of owners of our shares  (incorporated by reference to Exhibit 2.1 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.3                 |       | Amendment  No. 1 to the Second Amended and Restated Deposit Agreement, dated as of  August 10, 2001, by and among us, Citibank, N.A., as depositary, and the  holders and beneficial owners of ADSs evidenced by ADRs issued thereunder  (incorporated by reference to the Registration Statement on Form F-6  relating to the ADSs filed on June 11, 2007 (File No. 333-143636)). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.4                 |       | Deposit  Agreement, dated as of June 12, 2007, by and among us, Citibank, N.A.,  as depositary, and the holders and beneficial owners of ADSs evidenced by  ADRs issued thereunder (incorporated by reference to the Registration  Statement on Form F-6 relating to the common share ADSs filed on  May 7, 2007 (File No. 333-142654)).                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | Contract  of Concession for Generating Electric Energy, dated July 10, 1997,  between the Federal Government and us, relating to the provision of electric  energy generation services to the public (incorporated by reference to  Exhibit 4.1 to our Registration Statement on Form 20-F filed on  August 13, 2001 (File No. 1-15224)).                                          |

 

126

----

Table of Contents

 
| 4.2    |   | Contract  of Concession of Electric Energy Transmission Services, dated July 10,  1997, between the Federal Government and us, relating to the transmission of  electric energy to the public (incorporated by reference to Exhibit 4.2  to our Registration Statement on Form 20-F filed on August 13, 2001  (File No. 1-15224)).                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3    |   | Second  Amendment to the Electricity Transmission Concession Contract, dated  September 16, 2005 (incorporated by reference to Exhibit 4.3 to our  Registration Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4    |   | Third  Amendment to the Electricity Transmission Concession Contract, for the  Northern, Southern, Eastern, and Western geographic areas, dated  April 13, 2010.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.5    |   | Contracts  of Concession of Public Service for Distribution of Electric Energy, dated  July 10, 1997, between the Federal Government and us, relating to the  provision of electric energy distribution services to the public  (incorporated by reference to Exhibit 4.3 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6    |   | First  Amendment to the Electricity Distribution Concession Contract, dated  March 31, 2005 (incorporated by reference to Exhibit 4.5 to our  Registration Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.7    |   | Second  Amendment to the Electricity Distribution Concession Contract, dated  September 16, 2005 (incorporated by reference to Exhibit 4.6 to our  Registration Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.8    |   | 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)).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.9    |   | 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)).                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.10   |   | 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)).                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.11   |   | 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)).                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12   |   | Fourth  Amendment to the Contract for the Assignment of CRC Account, dated  January 23, 2006, between the State Government and us, relating to  amounts due to us from the State Government (incorporated by reference to  Exhibit 4.14 to our Registration Statement on Form 20-F filed on  June 30, 2006 (File No. 1-15224)).                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.13   |   | Announcement  of Start of Public Distribution of Senior Units under CRC Account  Securitization Fund, dated as of January 26, 2006 (incorporated by  reference to Exhibit 4.15 to our Registration Statement on  Form 20-F filed on June 30, 2006 (File No. 1-15224)).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.14   |   | Summary  of Indenture Covering Public Distribution of Non-Convertible Unsecured  Debentures, dated August 24, 2006, between Cemig Distribuição S.A. and Unibanco—União dos  Bancos Brasileiros S.A. (incorporated by reference to Exhibit 4.18 to  our Registration Statement on Form 20-F filed on July 23, 2007  (File No. 1-15224)).             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.15   |   | Summary  of Indenture Covering Public Distribution of Non-Convertible Unsecured  Debentures, dated April 17, 2007, between Cemig Geração e Transmissão S.A and  Unibanco—União dos Bancos Brasileiros S.A. (incorporated by reference to  Exhibit 4.19 to our Registration Statement on Form 20-F filed on  July 23, 2007 (File No. 1-15224)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.16   |   | Summary  of Indenture Covering the Second Issuance of Debentures, dated  December 19, 2007, between Cemig Distribuição S.A. and BB Banco de  Investimento S.A. (incorporated by reference to Exhibit 4.20 to our  Annual Report on Form 20-F filed on June 30, 2008 (File  No. 1-15224)).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.17   |   | Share  Purchase Agreement, dated April 23, 2009, between Cemig Geração and Transmissão S.A., Terna—Rete  Elettrica Nazionale S.p.A., and CEMIG (incorporated by reference to  Exhibit 4.22 to our Registration Statement on Form 20-F filed on  June 19, 2009 (File No. 1-15224)).                                                                  |

 

127

----

Table of Contents

 
| 4.18   |   | English  Summary of Share Purchase Agreement between Companhia Energética de Minas  Gerais — CEMIG and Andrade Gutierrez Concessões S.A., dated December 30,  2009.               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                  |
| 4.19   |   | English  Summary of Share Purchase Agreement between Companhia Energética de Minas  Gerais — CEMIG and Fundo de Investimento em Participações PCP, dated  December 30, 2009. |
|   |   |                                                                                                                                                                                                  |
| 4.20   |   | English  Summary of Put Option Agreement between Companhia Energética de Minas Gerais  — CEMIG and Enlighted Partners Venture Capital LLC, dated March 24,  2010.                      |
|   |   |                                                                                                                                                                                                  |
| 8      |   | List  of Subsidiaries (incorporated by reference to Exhibit 8 to our Annual  Report on Form 20-F filed on May 25, 2005 (File No. 1-15224)).                                       |
|   |   |                                                                                                                                                                                                  |
| 11     |   | Code  of Ethics (incorporated by reference to Exhibit 11 to our Annual Report  on Form 20-F filed on July 1, 2004 (File No. 1-15224)).                                            |
|   |   |                                                                                                                                                                                                  |
| 12.1   |   | Chief  Executive Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, dated June 30, 2010.                                                                          |
|   |   |                                                                                                                                                                                                  |
| 12.2   |   | Chief  Financial Officer, Investor Relations Officer and Control of Holding  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002, dated June 30, 2010.         |
|   |   |                                                                                                                                                                                                  |
| 13.1   |   | Chief  Executive Officer Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, dated June 30, 2010.                                                                          |
|   |   |                                                                                                                                                                                                  |
| 13.2   |   | Chief  Financial Officer, Investor Relations Officer and Control of Holding  Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002, dated June 30, 2010.         |

 

128

----

Table of Contents

 

**SIGNATURES**

 

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.

 
|   | COMPANHIA ENERGÉTICA DE MINAS  GERAIS—CEMIG |
|--------|-------------------------------------------------------|
|   |                                                  |   |
|   | By:                                                   | /s/ Djalma Bastos de Morais |
|   | Name:                                                 | Djalma Bastos de Morais |
|   | Title:                                                | Chief  Executive Officer |

 

 

Date:June 30, 2010

 

129

----

Table ofContents

 

***Companhia Energética de Minas Gerais — CEMIG***

 

*FinancialStatements as of December 31, 2009 and December 2008 and for theYears Ended December 31, 2009, 2008 and 2007 and Report of IndependentRegistered Public Accounting Firm*

 

F-1

----

Table ofContents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

TheBoard of Directors and Shareholders

Companhia Energética de Minas Gerais — CEMIG:

 

Wehave audited the accompanying consolidated balance sheets of CompanhiaEnergética de Minas Gerais — CEMIG and subsidiaries (collectively, “theCompany”) as of December 31, 2009 and 2008, and the related consolidatedstatements of operations and comprehensive income, changes in shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2009. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States of America). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of CompanhiaEnergética de Minas Gerais — CEMIG and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2009, inconformity with U.S. generally accepted accounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States of America), Companhia Energética deMinas Gerais — CEMIG’s internal control over financial reporting as ofDecember 31, 2009, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated June 28,2010 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 
|                   | KPMG Auditores Independentes     |
|------------------------|----------------------------------|
|                   |                             |
|                   | /s/ KPMG Auditores Independentes |
|                   |                             |
| Belo Horizonte, Brazil |                             |
| June 28, 2010     |                             |

 

F-2

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2009 AND 2008**

 

**(Expressedin millions of Brazilian *reais*)**

 

**ASSETS**

 
| ** **                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| CURRENT ASSETS:                                                 |       |     |       |     |       |
| Cash and cash  equivalents (note 6)                             |       | 3,904    |       | 1,969    |       |
| Accounts receivable,  net (note 7)                              |       | 1,949    |       | 1,705    |       |
| Accounts receivable -  use of basic transmission network        |       | 364      |       | 439      |       |
| Deferred regulatory  assets (note 4)                            |       | 263      |       | 754      |       |
| Deferred income tax  assets (note 5)                            |       | 82       |       | 48       |       |
| Recoverable taxes (note  8)                                     |       | 768      |       | 672      |       |
| Dividends                                                       |       | 81       |       | 86       |       |
| Escrow accounts                                                 |       | —   |       | 207      |       |
| Transmission tariff  review (notes 4 and 27)                    |       | 83       |       | —   |       |
| Others                                                          |       | 384      |       | 336      |       |
|                                                            |       | 7,878    |       | 6,216    |       |
|                                                            |       |     |       |     |       |
| INVESTMENTS IN  AFFILIATES (note 9)                             |       | 3,329    |       | 1,203    |       |
|                                                            |       |     |       |     |       |
| PROPERTY, PLANT AND,  EQUIPMENT, NET (note 10)                  |       | 13,863   |       | 13,733   |       |
| INTANGIBLES (note 10)                                           |       | 251      |       | 278      |       |
|                                                            |       | 14,114   |       | 14,011   |       |
|                                                            |       |     |       |     |       |
| OTHER ASSETS:                                                   |       |     |       |     |       |
| Accounts receivable,  net (note 7)                              |       | 32       |       | 17       |       |
| Deferred regulatory  assets (note 4)                            |       | 60       |       | 332      |       |
| Transmission tariff  review (notes 4 and 27)                    |       | 36       |       | —   |       |
| Recoverable taxes (note  8)                                     |       | 210      |       | 253      |       |
| Deferred income tax  assets (note 5)                            |       | 333      |       | 435      |       |
| Account receivable from  Minas Gerais State Government (note 3) |       | 1,824    |       | 1,801    |       |
| Escrow deposits (note  11)                                      |       | 663      |       | 351      |       |
| Other                                                           |       | 82       |       | 162      |       |
|                                                            |       | 3,240    |       | 3,351    |       |
| Total assets                                                    |       | 28,561   |       | 24,781   |       |

 

See accompanyingnotes to consolidated financial statements.

 

F-3

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2009 AND 2008**

 

**(Expressedin millions of Brazilian *reais*,except share amounts)**

 

**LIABILITIESAND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CURRENT LIABILITIES:                                                                                                           |       |     |       |     |       |
| Financing (note 14)                                                                                                            |       | 3,913    |       | 1,197    |       |
| Accounts payable to  suppliers (note 12)                                                                                       |       | 668      |       | 719      |       |
| Payroll and related  charges                                                                                                   |       | 341      |       | 279      |       |
| Taxes payable (note 13)                                                                                                        |       | 451      |       | 471      |       |
| Regulatory liabilities  — tariff review (notes 4 and 26)                                                                  |       | —   |       | 214      |       |
| Dividends and interest  on capital (note 18)                                                                                   |       | 954      |       | 960      |       |
| Employee profit sharing  (note 21)                                                                                             |       | 97       |       | 117      |       |
| Regulatory charges  payable (note 15)                                                                                          |       | 317      |       | 460      |       |
| Deferred income tax  liabilities (note 5)                                                                                      |       | 27       |       | —   |       |
| Derivative financial  instruments (note 24)                                                                                    |       | 78       |       | 94       |       |
| Employee post-retirement  benefits (note 16)                                                                                   |       | 82       |       | 75       |       |
| Accrued liability for  contingencies (note 17)                                                                                 |       | 128      |       | —   |       |
| Other                                                                                                                          |       | 329      |       | 303      |       |
|                                                                                                                           |       | 7,385    |       | 4,889    |       |
|                                                                                                                           |       |     |       |     |       |
| LONG-TERM LIABILITIES:                                                                                                         |       |     |       |     |       |
| Financing (note 14)                                                                                                            |       | 5,364    |       | 5,314    |       |
| Taxes payable (note 13)                                                                                                        |       | 338      |       | 106      |       |
| Regulatory charges payable  (note 15)                                                                                          |       | 262      |       | 20       |       |
| Deferred income tax  liabilities (note 5)                                                                                      |       | 216      |       | 148      |       |
| Accrued liability for  contingencies (note 17)                                                                                 |       | 519      |       | 472      |       |
| Special obligations  (note 2r)                                                                                                 |       | 2,504    |       | 2,510    |       |
| Employee  post-retirement benefits (note 16)                                                                                   |       | 1,308    |       | 1,765    |       |
| Other                                                                                                                          |       | 242      |       | 224      |       |
|                                                                                                                           |       | 10,753   |       | 10,559   |       |
|                                                                                                                           |       |     |       |     |       |
| SHAREHOLDERS’ EQUITY:  (note 18)                                                                                          |       |     |       |     |       |
| Share capital -                                                                                                                |       |     |       |     |       |
| Preferred — 349,222,649  thousand shares authorized and issued and 349,015,265 outstanding as of  December 31, 2009. |       | 1,635    |       | 1,286    |       |
| Common — 271,154,243  thousand shares authorized, issued and outstanding as of December 31,  2009.                   |       | 1,273    |       | 1,002    |       |
|                                                                                                                           |       | 2,908    |       | 2,288    |       |
| Additional paid-in  capital                                                                                                    |       | 3,170    |       | 3,170    |       |
| Appropriated retained  earnings                                                                                                |       | 1,673    |       | 2,200    |       |
| Unappropriated retained  earnings                                                                                              |       | 3,130    |       | 2,386    |       |
| Accumulated other comprehensive  loss                                                                                          |       | (458     | )          | (711     | )          |
|                                                                                                                           |       | 10,423   |       | 9,333    |       |
| Total liabilities and shareholders’ equity                                                                                |       | 28,561   |       | 24,781   |       |

 

See accompanyingnotes to consolidated financial statements.

 

F-4

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS — CEMIG**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**FORTHE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 

**(Expressedin millions of Brazilian *reais*,except share and per share amounts)**

 
| ** **                                                                                                                        | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| NET OPERATING REVENUES:                                                                                                           |       |        |       |        |       |        |       |
| Electricity sales to  final customers (note 19a)                                                                                  |       | 10,994      |       | 10,497      |       | 10,191      |       |
| Electricity sales to  the interconnected power system (note 19a)                                                                  |       | 1,682       |       | 1,069       |       | 1,134       |       |
| Use of basic  transmission network (note 19d)                                                                                     |       | 1,999       |       | 1,865       |       | 1,705       |       |
| Other operating  revenues (note 19b)                                                                                              |       | 277         |       | 241         |       | 236         |       |
| Taxes on revenues (note  19c)                                                                                                     |       | (3,852      | )          | (3,844      | )          | (3,836      | )          |
|                                                                                                                              |       |        |       |        |       |        |       |
| Total operating  revenues, net                                                                                                    |       | 11,100      |       | 9,828       |       | 9,430       |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| OPERATING COSTS AND  EXPENSES:                                                                                                    |       |        |       |        |       |        |       |
| Electricity purchased  for resale (note 20)                                                                                       |       | (3,061      | )          | (2,267      | )          | (2,147      | )          |
| Use of basic  transmission network                                                                                                |       | (756        | )          | (634        | )          | (564        | )          |
| Depreciation and  amortization                                                                                                    |       | (711        | )          | (769        | )          | (878        | )          |
| Personnel (note 20)                                                                                                               |       | (1,190      | )          | (1,004      | )          | (884        | )          |
| Regulatory charges  (note 20)                                                                                                     |       | (1,142      | )          | (1,024      | )          | (967        | )          |
| Third-party services  (note 20)                                                                                                   |       | (729        | )          | (605        | )          | (550        | )          |
| Employee  post-retirement benefits (note 16)                                                                                      |       | (176        | )          | (277        | )          | (140        | )          |
| Materials and supplies                                                                                                            |       | (105        | )          | (170        | )          | (148        | )          |
| Reversion (Provision)  for loss on deferred regulatory assets (note 4)                                                            |       | 8           |       | (19         | )          | (146        | )          |
| Employee profit sharing  (note 21)                                                                                                |       | (233        | )          | (362        | )          | (455        | )          |
| Other (note 20)                                                                                                                   |       | (486        | )          | (410        | )          | (472        | )          |
|                                                                                                                              |       |        |       |        |       |        |       |
| Total operating costs  and expenses                                                                                               |       | (8,581      | )          | (7,541      | )          | (7,351      | )          |
|                                                                                                                              |       |        |       |        |       |        |       |
| Operating income                                                                                                                  |       | 2,519       |       | 2,287       |       | 2,079       |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| FINANCIAL (EXPENSE)  INCOME, NET (note 22)                                                                                        |       | (109        | )          | 17          |       | (48         | )          |
|                                                                                                                              |       |        |       |        |       |        |       |
| NON OPERATING INCOME                                                                                                              |       |        |       |        |       |        |       |
| Equity in results of  Investments                                                                                                 |       | 165         |       | 204         |       | 223         |       |
| Gain on sale of Way TV                                                                                                            |       | —      |       | —      |       | 49          |       |
|                                                                                                                              |       | 165         |       | 204         |       | 272         |       |
| Income before income  taxes                                                                                                       |       | 2,575       |       | 2,508       |       | 2,303       |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| INCOME TAXES (note 5)                                                                                                             |       |        |       |        |       |        |       |
| Current tax expense                                                                                                               |       | (830        | )          | (973        | )          | (941        | )          |
| Deferred tax benefit                                                                                                              |       | 23          |       | 218         |       | 256         |       |
|                                                                                                                              |       | (807        | )          | (755        | )          | (685        | )          |
|                                                                                                                              |       |        |       |        |       |        |       |
| NET INCOME                                                                                                                        |       | 1,768       |       | 1,753       |       | 1,618       |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| OTHER COMPREHENSIVE INCOME  (LOSS):                                                                                               |       |        |       |        |       |        |       |
| Pension Plan  adjustments (note 16)                                                                                               |       | 383         |       | 453         |       | (605        | )          |
| Deferred tax (expense)  benefit                                                                                                   |       | (130        | )          | (154        | )          | 205         |       |
|                                                                                                                              |       | 253         |       | 299         |       | (400        | )          |
| COMPREHENSIVE INCOME                                                                                                              |       | 2,021       |       | 2,052       |       | 1,218       |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| Weighted average number  of common shares outstanding during the year (thousand) for purposes of  calculating basic earnings      |       | 271,154,243 |       | 271,154,243 |       | 265,778,129 |       |
| Weighted average number  of preferred shares outstanding during the year (thousand) for purposes of  calculating basic earnings   |       | 349,015,265 |       | 348,963,420 |       | 342,039,463 |       |
|                                                                                                                              |       | 620,169,508 |       | 620,117,663 |       | 607,817,592 |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| Weighted average number  of common shares outstanding during the year (thousand) for purposes of  calculating diluted earnings    |       | 273,850,193 |       | 274,634,801 |       | 278,078,200 |       |
| Weighted average number  of preferred shares outstanding during the year (thousand) for purposes of  calculating diluted earnings |       | 349,015,265 |       | 348,963,420 |       | 342,039,463 |       |
|                                                                                                                              |       | 622,865,458 |       | 623,598,221 |       | 620,117,663 |       |
|                                                                                                                              |       |        |       |        |       |        |       |
| Basic earnings per  thousand common shares - In Brazilian reais                                                                   |       | 2.85        |       | 2.83        |       | 2.66        |       |
| Basic earnings per  thousand preferred shares - In Brazilian reais                                                                |       | 2.85        |       | 2.83        |       | 2.66        |       |
| Diluted earnings per  thousand common shares - In Brazilian reais                                                                 |       | 2.84        |       | 2.81        |       | 2.61        |       |
| Diluted earnings per  thousand preferred shares - In Brazilian reais                                                              |       | 2.84        |       | 2.81        |       | 2.61        |       |

 

See accompanyingnotes to consolidated financial statements.

 

F-5

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**FORTHE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 

**(Expressedin millions of Brazilian *reais*)**

 
| ** **                                      | ** **   | **2009**     | ** **   | **2008**     | ** **   | **2007**     | ** **   |
|-------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| SHARE CAPITAL:                                  |         |         |         |         |         |         |         |
| Preferred -                                     |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | 1,286        |         | 1,258        |         | 804          |         |
| Transfer from  appropriated retained earnings   |         | 349          |         | 28           |         | 454          |         |
| Balance, end of year                            |         | 1,635        |         | 1,286        |         | 1,258        |         |
|                                            |         |         |         |         |         |         |         |
| Common -                                        |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | 1,002        |         | 981          |         | 624          |         |
| Transfer from  appropriated retained earnings   |         | 271          |         | 21           |         | 357          |         |
| Balance, end of year                            |         | 1,273        |         | 1,002        |         | 981          |         |
|                                            |         | 2,908        |         | 2,288        |         | 2,239        |         |
| ADDITIONAL PAID-IN  CAPITAL                     |         | 3,170        |         | 3,170        |         | 3,170        |         |
|                                            |         |         |         |         |         |         |         |
| APPROPRIATED RETAINED  EARNINGS:                |         |         |         |         |         |         |         |
| Fiscal incentive  investment reserve-           |         | 45           |         | 45           |         | 45           |         |
| *** ***                                    | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Rate shortfall reserve-                         |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | 1,788        |         | 1,837        |         | 2,648        |         |
| Transfer to capital  stock                      |         | (620         | )            | (49          | )            | (811         | )            |
|                                            |         |         |         |         |         |         |         |
| Balance, end of year                            |         | 1,168        |         | 1,788        |         | 1,837        |         |
|                                            |         |         |         |         |         |         |         |
| Legal reserve-                                  |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | 367          |         | 273          |         | 186          |         |
| Transfer from  unappropriated retained earnings |         | 93           |         | 94           |         | 87           |         |
|                                            |         |         |         |         |         |         |         |
| Balance, end of year                            |         | 460          |         | 367          |         | 273          |         |
|                                            |         | 1,673        |         | 2,200        |         | 2,155        |         |
| UNAPPROPRIATED RETAINED  EARNINGS:              |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | 2,386        |         | 1,670        |         | 1,503        |         |
| Net income                                      |         | 1,768        |         | 1,753        |         | 1,618        |         |
| Transfer to  appropriated retaining earnings    |         | (93          | )            | (94          | )            | (87          | )            |
| Dividends and interest  on capital              |         | (931         | )            | (943         | )            | (1,364       | )            |
|                                            |         |         |         |         |         |         |         |
| Balance, end of year                            |         | 3,130        |         | 2,386        |         | 1,670        |         |
|                                            |         |         |         |         |         |         |         |
| ACCUMULATED OTHER  COMPREHENSIVE INCOME (LOSS): |         |         |         |         |         |         |         |
| Balance, beginning of  year                     |         | (711         | )            | (1,010       | )            | (610         | )            |
| Other comprehensive  income (loss)              |         | 253          |         | 299          |         | (400         | )            |
|                                            |         |         |         |         |         |         |         |
| Balance, end of year                            |         | (458         | )            | (711         | )            | (1,010       | )            |
|                                            |         |         |         |         |         |         |         |
| Shareholders’ equity at  end of year       |         | 10,423       |         | 9,333        |         | 8,224        |         |

 

See accompanyingnotes to consolidated financial statements.

 

F-6

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 

**(Expressedin millions of Brazilian *reais*)**

 
| ** **                                                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            |       |     |       |     |       |     |       |
| Net income                                                                        |       | 1,768    |       | 1,753    |       | 1,618    |       |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                    |       | 711      |       | 769      |       | 878      |       |
| Monetary variation and  exchange rate variation gain                              |       | (130     | )          | (40      | )          | (438     | )          |
| Loss on disposal of  property, plant and equipment                                |       | 31       |       | 32       |       | 37       |       |
| Employee  post-retirement benefits                                                |       | (67      | )          | 22       |       | 106      |       |
| Provision for  contingencies and doubtful accounts receivable                     |       | 205      |       | 231      |       | 70       |       |
| Provision for loss on  deferred regulatory assets                                 |       | (8       | )          | 19       |       | 146      |       |
| Deferred tax benefit                                                              |       | (23      | )          | (218     | )          | (256     | )          |
| Equity in results of  investments                                                 |       | (165     | )          | (204     | )          | (223     | )          |
| Revenue related to  Transmission tariff review                                    |       | (119     | )          | —   |       | —   |       |
| Other                                                                             |       | —   |       | (51      | )          | 49       |       |
|                                                                              |       |     |       |     |       |     |       |
| Decrease (increase) in  operating assets-                                         |       |     |       |     |       |     |       |
| Accounts receivable                                                               |       | (318     | )          | (136     | )          | 7        |       |
| Recoverable taxes                                                                 |       | (53      | )          | 81       |       | (237     | )          |
| Accounts receivable —  use of basic transmission network                     |       | 75       |       | 19       |       | (108     | )          |
| Deferred Regulatory  assets                                                       |       | 771      |       | 330      |       | 965      |       |
| Other                                                                             |       | 384      |       | 243      |       | 229      |       |
|                                                                              |       |     |       |     |       |     |       |
| Increase (decrease) in  operating liabilities-                                    |       |     |       |     |       |     |       |
| Accounts payable to  suppliers                                                    |       | (51      | )          | (90      | )          | (41      | )          |
| Payroll and related  charges                                                      |       | 62       |       | 56       |       | 48       |       |
| Taxes payable                                                                     |       | (20      | )          | (61      | )          | 4        |       |
| Regulatory charges  payable                                                       |       | 89       |       | 79       |       | (32      | )          |
| Accrued interest on  long-term financing and short-term loans                     |       | 17       |       | 72       |       | (77      | )          |
| Other                                                                             |       | 160      |       | 55       |       | 91       |       |
| Net cash provided by  operating activities                                        |       | 3,319    |       | 2,961    |       | 2,836    |       |
|                                                                              |       |     |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                             |       |     |       |     |       |     |       |
| Escrow deposits                                                                   |       | (312     | )          | (89      | )          | (17      | )          |
| Acquisition of  investments in affiliates                                         |       | (2,014   | )          | (220     | )          | (26      | )          |
| Acquisition of  property, plant and equipment                                     |       | (851     | )          | (971     | )          | (1,120   | )          |
| Proceeds from sale of  affiliates                                                 |       | —   |       | —   |       | 49       |       |
| Net cash used in  investing activities                                            |       | (3,177   | )          | (1,280   | )          | (1,114   | )          |
|                                                                              |       |     |       |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                            |       |     |       |     |       |     |       |
| Proceeds from issuance  of long-term financing                                    |       | 914      |       | 176      |       | 589      |       |
| Repayment of long-term  financing and short-term loans                            |       | (884     | )          | (807     | )          | (1,134   | )          |
| Proceeds from  short-term loans                                                   |       | 2,700    |       | —   |       | 833      |       |
| Dividends and interest  on capital paid                                           |       | (937     | )          | (865     | )          | (1,334   | )          |
| Net cash provided by  (used in) financing activities                              |       | 1,793    |       | (1,496   | )          | (1,046   | )          |
|                                                                              |       |     |       |     |       |     |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                             |       | 1,935    |       | 185      |       | 676      |       |
|                                                                              |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                                                       |       |     |       |     |       |     |       |
| Beginning of the year                                                             |       | 1,969    |       | 1,784    |       | 1,108    |       |
| End of the year                                                                   |       | 3,904    |       | 1,969    |       | 1,784    |       |
|                                                                              |       | 1,935    |       | 185      |       | 676      |       |
|                                                                              |       |     |       |     |       |     |       |
| SUPPLEMENTARY CASH  FLOWS DISCLOSURE:                                             |       |     |       |     |       |     |       |
| Taxes paid - income  taxes                                                        |       | 731      |       | 867      |       | 1,091    |       |
| Interest paid, net of  interest capitalized                                       |       | 577      |       | 644      |       | 672      |       |
| SCHEDULE OF NONCASH  INVESTING AND FINANCING ACTIVITIES:                          |       |     |       |     |       |     |       |
| Accounts receivables  from State Government offset by dividends                   |       | 127      |       | 129      |       | 122      |       |

 

See accompanyingnotes to consolidated financial statements.

 

F-7

----

Table ofContents

 

**COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER31, 2009, 2008 AND 2007**

 

**(Amountsexpressed in millions of Brazilian *reais*,unless otherwise indicated)**

 

**1.****                 ****THE COMPANY AND ITS OPERATIONS**

 

(a) The Company

 

CompanhiaEnergética de Minas Gerais, “CEMIG” or the “Company”, a listed company, hasoperated solely and exclusively as a holding company since January 1, 2005.CEMIG has shareholder participations in individually and jointly controlledsubsidiaries with share securities traded at Corporate Governance Level 1 ofthe São Paulo stock exchange (“Bovespa”), on the stock exchanges of the UnitedStates of America and Spain. The main objectives of its subsidiaries are theconstruction and operation of systems used in production, transformation,transmission, distribution and sales of electric energy, as well as thedevelopment of activities in the different fields of energy, for the purpose ofcommercial operation.

 

Themajority of CEMIG’s subsidiaries are concessionaires of electric utilityservices, that are subject to regulations set by the Agência Nacional deEnergia Elétrica (the Brazilian National Electric Energy Agency or “ANEEL”), anagency of the Brazilian Federal Government (the “Federal Government”).

 

TheCompany’s consolidated operating subsidiaries as of December 31, 2009 areas follows:

 

·                  Cemig Geração e TransmissãoS.A. (“Cemig Geração e Transmissão”) (100.00% interest) — Electric powergeneration and transmission, through 48 plants — (43 hydroelectric, 4 wind and1 thermoelectric plants) — and transmission lines mostly belonging to the basicgrid of the Brazilian generation and transmission system. Cemig Geração eTransmissão S.A. has interests in the following companies, of which only CemigBaguari Energia S.A. was consolidated.

 

·                  Hidrelétrica Cachoeirão S.A.(“Cachoeirão”) (jointly controlled - 49.00% interest) — Generation and sale of electric energy as anindependent power producer, through the Cachoeirão hydroelectric power plantlocated at Pocrane, in the State of Minas Gerais. The power plant  became operational on December 30, 2008.

 

·                  Central Eólica Praias deParajuru S.A. (“Parajuru”) (jointly controlled — 49.00% interest) - Productionand sale of electricity at a wind farm in Beberibe’s city in the state ofCeará. The plant became operational in August 2009.

 

·                  Baguari Energia S.A. (jointly controlled - 69.39% interest) -Construction, operation, maintenance and commercial operation of the BaguariHydroelectric Plant, through participation in the UHE Baguari Consortium(Baguari Energia 49.00% and Neoenergia 51.00%), located on the river Doce inGovernador Valadares, Minas Gerais State. The first unit became operational in September 2009,the second in November 2009, the third in March 2010 and the fourthin May 2010.

 

·                  Transmissora Aliança de Energia Elétrica S.A. (“TAESA”) previouslydenominated as Terna Participações S.A.(jointly controlled — 32.27% interest) - Construction, operation andmaintenance of electricity transmission lines in 11 states of Brazil throughthe following subsidiaries’ companies in which it has a controlling or otherinterest: TSN — Transmissora Sudeste Nordeste S.A.; Novatrans Energia S.A.;ETEO — Empresa de Transmissão de Energia do Oeste S.A.; ETAU — Empresa deTransmissão do Alto Uruguai S.A.; Brasnorte Transmissora de Energia S.A.; andTerna Serviços Ltda.

 

·                  Transmissora Alterosa de Energia S.A. (“Alterosa”) (jointly controlled —49.00% interest) - Holding company created as a consequence of the split ofTransmissora Atlântico de Energia Elétrica S.A. to hold interests in companiesin the electricity transmission sector. See more details in note 9.

 

F-8

----

Table of Contents

 

·                  CentralEólica Praias de Morgado S.A. (“Morgado”) (jointly controlled — 49.00%interest): The Morgado, also in the municipality of Aracaju in the state ofCeará, Northern Brazil. The plant became operationalin May 2010 (in development stage as at December 31, 2009).

 

Cemig Geração e Transmissão has interests in the followingdevelopment-stage companies:

 

·                  Guanhães Energia S.A. (“Guanhães”) (jointly controlled — 49.00% interest) - Generation and sale of electric energy through the construction andcommercial operation of the following Small Hydro Plants: Dores de Guanhães;Senhora do Porto; and Jacaré, located in the municipality  of Dores de Guanhães; and Fortuna II, locatedin the municipality of Virginópolis, in Minas Gerais State. The plants are inthe construction phase, with operations scheduled to begin in the firsthalf of 2012;

 

·                  Cemig Baguari Energia S.A. (“Baguari”) (subsidiary — 100.00% interest) -Generation and sale of electric energy as an independent power producer infuture projects;

 

·                  Madeira Energia S.A. — (jointly controlled — 10.00% interest) -Implementation, construction, operation and commercial operation of the SantoAntônio hydroelectric plant in the Madeira River Basin, in the State ofRondônia, with commercial start up scheduled for 2012;

 

·                  Hidrelétrica Pipoca S.A. (“Pipoca PCH”) (jointly controlled - 49.00%interest) - Independent production of electricity, through construction andcommercial operation of the Pipoca PCH (Small Hydro Plant), located on theManhuaçu River, in the Municipalities of Caratinga and Ipanema, in the State ofMinas Gerais. Operational start up is scheduled for July 2010;

 

·                  Empresa Brasileira de Transmissão de Energia S. A. (“EBTE”) (jointlycontrolled - 49.00% interest) - holder of concession for public electricitytransmission service, through the transmission lines of the State of MatoGrosso. Operational start up is scheduled for September 2010;

 

·                  Central Eólica Volta do Rio S.A. (“Volta do Rio”) (jointly controlled —49.00% interest) - The Volta do Rio Wind Farm, in the municipality of Aracajuin the state of Ceará, Northern Brazil. Operational start up planned for theend of June, 2010.

 

·                  Cemig Distribuição S.A. (“CemigDistribuição”) (100.00% interest) — Electric power distribution throughdistribution grids and lines covering approximately 97.00% of the State ofMinas Gerais;

 

·                  Sá Carvalho S.A. (“SáCarvalho”) (100.00% interest) - Generation and sale of electric energy from theSá Carvalho hydroelectric power plant, as an electric energy public serviceconcessionaire;

 

·                  Usina Térmica Ipatinga S.A.(“Ipatinga”) (100.00% interest) - Generation and sale of electric energy, as anindependent power producer, at the Ipatinga thermoelectric power plant locatedat the facilities of Usinas Siderúrgicas de Minas Gerais S.A. — USIMINAS;

 

·                  Cemig Telecomunicações S.A. (“Cemig Telecom”) (previously denominated asEmpresa de Infovias S.A.) (100.00% interest) - Renderingtelecommunication services and developing activities related thereto, throughmultiservice networks using optical fiber cable, coaxial cable and otherelectronic equipment;

 

·                  Efficientia S.A. (“Efficientia”)(100.00% interest) - Rendering efficiency, optimization and energy solutionsservices through studies and carrying out projects, as well as providingoperating and maintenance services, to energy supply facilities;

 

·                  Horizontes Energia S.A. (“Horizontes”)(100.00% interest) - Generation and sale of electric energy, as an independentpower producer, at the Machado Mineiro and Salto do Paraopeba hydroelectricpower plants, located in the State of Minas Gerais, and the Salto Voltão andSalto do Passo Velho hydroelectric power plants, located in the State of SantaCatarina;

 

F-9

----

Table ofContents

 

·                  Central Termelétrica deCogeração S.A. (“Cogeração”) (100.00% interest) — Generation and sale ofelectric energy, as an independent power producer in future projects;

 

·                  Rosal Energia S.A. (“Rosal”)(100.00% interest) — Generation and sale of electric energy as an electricenergy public service concessionaire through Rosal hydroelectric plant, locatedon the border between Rio de Janeiro and Espírito Santo States;

 

·                  Central Hidrelétrica PaiJoaquim S.A. (“Pai Joaquim”) (100.00% interest) — Generation and sale ofelectric energy, as an independent power producer in future projects;

 

·                  Cemig PCH S.A. (“CEMIG PCH”)(100.00% interest) - Generation and sale of electric energy, as an independentpower producer, at the Pai Joaquim hydroelectric power plant, located in thestate of Minas Gerais;

 

·                  Cemig Capim Branco EnergiaS.A. (“CEMIG Capim Branco”) (100.00% interest) - Generation and sale ofelectric energy, as an independent power producer, at the Armador Aguiar I andII hydroelectric power plants, located in the state of Minas Gerais, builtthrough a consortium with private-sector partners;

 

·                  Usina Termelétrica Barreiro S.A. (“UTE Barreiro S.A.”) (“Barreiro”)(100.00% interest) - Generation and sale of electric energy, as an independentthermoelectric power producer, at the Central Termelétrica Barreiro (“UTEBarreiro”) located at the facilities of V&M do Brasil S.A., in Minas GeraisState;

 

·                  Cemig Trading S.A. (“Trading”)(100.00% interest) — A development stage enterprise engaged in the purchase andsale of energy;

 

·                  Cemig Serviços S.A. (100.00%interest) — Formed in April 2008 to provide services related togeneration, transmission and distribution of electric power.

 

Asof December 31, 2009, the Company also has the following interests (equitymethod investments):

 

·                  Light S.A. (“Light”)(jointly controlled — 13.03% interest) — holding company that holds direct orindirect interests in other companies and, directly or indirectly, to operateelectricity generation, transmission, trading or distribution services, andother related services. It is the controlling shareholder of:

 

·                  Light Serviços de Eletricidade S.A. (“Light SESA”)- Listed Company in Brazil primarily operating in electricity distribution, in31 municipalities of the state of Rio de Janeiro.

 

·                  Light Energia S.A. (“Light Energia”) - Operatingin the study, planning, construction and commercial operation of systems forelectricity generation, transmission and trading and related services.

 

·                  LightEsco Prestação de Serviços Ltda. (“Light Esco”) - Operating in provision of services ofco-generation, projects, management and solutions such as improvement ofelectricity efficiency, planning of electricity support and supply structuresand sale of electricity in the Free Market.

 

·                  Itaocara Energia Ltda.(“Itaocara Energia”) -Company at development stage, where the mainly objective is the production andcommercial operation of electricity.

 

·                  Lightger Ltda. (“Light Ger”) and Lighthidro Ltda (“LightHidro”) - Companies at development stage, where the mainly objective is theparticipation in auctions of concessions, authorizations and permissions fornew power plants. On December 24, 2008, Light Ger obtained theinstallation license authorizing the start of works to build the ParacambiSmall Hydro Plant.

 

·                  Instituto Light para o Desenvolvimento Urbano eSocial (“Instituto Light”) - Formed to participate in social and culturalprojects; has interest in economic and social development of cities,reaffirming the company’s vocation for work of social benefit as a corporatecitizen.

 

TheCompany has commenced efforts to acquire an additional shareholding interest inLight in 2010 — see more details in note 9.

 

F-10

----

Table ofContents

 

·                  Companhia de Gás de MinasGerais (“GASMIG”) (jointly controlled - 55.19% interest) - Acquisition,transportation and distribution of natural gas and related products throughconcession from the government of the State of Minas Gerais for distribution ofgas in the State;

 

·                  Companhia Transleste deTransmissão (“Transleste”) (jointly controlled - 25.00% interest) — Operationtransmission line (“TL”) connecting the substation located in Montes Claros andthe substation of the Irapé Hydroelectric Power Plant;

 

·                  Companhia Transudeste deTransmissão (“Transudeste”) (jointly controlled - 24.00% interest) —Constructionand operation of TL Itutinga — Juiz de Fora;

 

·                  Companhia Transirapé deTransmissão (“Transirapé”) (jointly controlled - 24.50% interest) —Constructionand operation of TL Irapé — Araçuaí;

 

·                  Empresa Paraense deTransmissão de Energia S.A.(“ETEP”) (jointly controlled — 40.19% interest) —Electricenergy public service concessionaire located in the state of Pará. See moreinformation of an increased stake in this company in note 9;

 

·                  Empresa Norte de Transmissãode Energia S.A.(“ENTE”) (jointly controlled — 36.69% interest) —Electric energypublic service concessionaire with two transmission lines (“TL”), one locatedin the state of Pará and the other in the state of Maranhão. See moreinformation of an increased stake in this company in note 9;

 

·                  Empresa Regional deTransmissão de Energia S.A. (“ERTE”) (jointly controlled — 36.69% interest) -Electric energy public service concessionaire of transmission line (“TL”)located in the state of Pará. See more information of an increased stake inthis company in note 9;

 

·                  Empresa Amazonense deTransmissão de Energia S.A. (“EATE”) (jointly controlled — 36.35% interest) -Electric energy public service concessionaire of transmission line (“TL”)between its substation of Tucuruí, Marabá, Imperatriz, Presidente Dutraand Açailândia. In addition, EATE has interests in the following transmissionconcessionaire: Empresa Brasileira de Transmissão de Energia - “EBTE” with 51%of interest; Sistema de Transmissão Catarinense - “STC”, with 80% of interestand Lumitrans Co. Transmissora de Energia Elétrica - “Lumitrans” with 80% ofinterest. See more information of an increased stake in this company in note 9;

 

·                  Empresa Catarinense deTransmissão de Energia S.A. (“ECTE”) (jointly controlled — 13.37% interest) -Electric energy public service concessionaire of transmission line (“TL”)located in the state of Santa Catarina. See more information of an increased stakein this company in note 9;

 

·                  Axxiom Soluções TecnológicasS.A. (“AXXIOM”) (jointly controlled — 49.00% interest) - Formed in August 2007to provide services of implementation and management of systems for electricitysector companies.

 

CEMIG also has interests in the following development-stage companiesas of December 31, 2009:

 

·                  Companhia de TransmissãoCentroeste de Minas  (“Centroeste”)(jointly controlled - 51.00% interest) —Construction and operation of Furnas —Pimenta transmission line;

 

·                  Transchile CharrúaTransmisión S.A. — (“Transchile”) (jointly controlled — 49.00% interest) —Installation, operation and maintenance of the Charrúa — Nueva Temucotransmission line and two transmission line sections in the Charrúa and NuevaTemuco sub-stations, in the central region of Chile. According to theconstruction schedule the line will start operating in the first half of 2010;

 

Thejoint control investments were made by CEMIG through shareholders’ agreementswith the other shareholders of the investee.

 

F-11

----

Table ofContents

 

(b) The electricity sector in Brazil:

 

Theelectricity sector in Brazil is regulated by the Federal Government, actingthrough its Ministry of Mines and Energy (“MME”), which has exclusive authorityover the electricity sector. Regulatory policy for the sector is implemented bythe Agência Nacional de Energia Elétrica (the Brazilian National ElectricEnergy Agency or “ANEEL”).

 

Retailelectricity sales by the Company are made pursuant to provisions of itslong-term electricity sales concession agreements. Under the terms of theconcession agreements, the Company is authorized to charge its customers a ratefor electricity supply that consists of two components: (1) anon-controllable energy generation, transmission and distribution costpass-through component (“Parcel A costs”); and (2) an operating costcomponent (“Parcel B costs”). Both components are established as part of theoriginal concession for certain initial periods. 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 other similaradjustment factor), if any, to the Parcel B costs (the “Adjustment Escalator”)for the subsequent period. This review can result in an Adjustment Escalatorthat has a positive, zero or negative value.

 

Inaddition to the adjustments of Parcel A and Parcel B costs mentioned above, theelectricity sales concessions provide for an annual rate adjustment based onseveral factors, including inflation. In addition, as a result of regulatorychanges in December 2001, the Company may now request rate adjustments arisingfrom significant events that disrupt the economic and financial equilibrium ofits business. Other normal or recurring factors (such as increases in purchasedpower costs, taxes on revenue generated or local inflation) are also allowed tobe offset through specific rate increases. When making a request for such rateincrease, the Company is required to prove the financial impact of the citedevents in its operations. See notes 2 and 4.

 

Underthe law creating the new model for the industry, a generation company is notallowed to sell energy directly to the distribution company. As a result, theCompany has to sell its electricity in a regulated market through publicauctions conducted by ANEEL, or in the Free Contracting Environment (the “ACL”).  Legislation allows distributors that contractwith the generation company under the Regulated Contracting Environment (the “ACR”)to reduce the quantity of energy contracted up to a certain limit.

 

**2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

(a)          **Basis of presentation** - Theconsolidated financial statements is presented in million of Brazilian reaisand have been prepared in accordance with accounting principles generally accepted in the United States of America(“U.S. GAAP”) and the rules and regulations of the Securities andExchange Commission (SEC). U.S. GAAP differs in certain respects from theCompany’s statutory financial statements prepared in accordance with accountingpractices adopted in Brazil (“Brazilian GAAP”), which are prepared and filed inaccordance with the specific rules of the *Comissãode Valores Mobiliários* (the Brazilian Securities Commission, or “CVM”)and the Agência Nacional de Energia Elétrica (the Brazilian National ElectricEnergy Agency or “ANEEL”).

 

In accordance with CEMIG’s management analysis of ASC Subtopic 830-10,CEMIG and all of its subsidiaries has adopted the Brazilian Real as thefunctional currency.

 

Pursuant to local securities and exchange commission (“CVM”) currentregulations, the Company is required to report its consolidated financialstatements under International Financial Reporting Standards (“IFRS”) beginningwith the year ending December 31, 2010. For this reason, the Company iscurrently expecting to discontinue U.S. GAAP reporting for the year ending December 31,2010. The Company is in the process of evaluating all the potential effectsrelated to these standards and interpretation, which may cause relevant impactin the consolidated financial statements for the year ended December 31,2009 to be presented comparatively to the consolidated financial statements forthe year to be ended on December 31, 2010, as well as to the followingfiscal years.

 

(b)         **Use of Estimates** - Thepreparation of consolidated financial statements in conformity with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. Significant items subject to suchestimates and assumptions include the useful lives of property, plant andequipment; valuation allowances for accounts receivables, deferred income taxbenefits and the accounts receivable from the State Government; therecoverability of deferred regulatory assets; the valuation of derivatives;income tax uncertainties and other contingencies; estimates of post-retirementbenefit obligations; and other similar estimates. The current economicenvironment has increased the degree of uncertainty inherent in those estimatesand assumptions.

 

F-12

----

Table ofContents

 

(c)            **Principlesof consolidation** - Theaccompanying consolidated financial statements include the accounts of CEMIGand its subsidiaries, except jointly controlled companies which are reportedunder the equity method. In accordance with FASB ASC Section 810-10-25 - Variable Interest Entities - (FASBStatement No. 46(R), Consolidationof Variable Interest Entities), the Company also consolidates any variableinterest entities (“VIEs”) of which it is the primary beneficiary, as defined.When the Company does not have a controlling interest in an entity, but exertsa significant influence over the entity, the Company applies the equity methodof accounting. All significant intercompany balances and transactions have beeneliminated in the consolidation.

 

(d)           **Foreigncurrencies** - Assets and liabilities denominated in foreigncurrencies are related 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)            **Cash andcash equivalents** - The Company considers unrestricted cash on hand,deposits in banks and short-term investments readily convertible to cash to becash and cash equivalents.

 

(f)              **Accountsreceivable** - Includes both amounts billed to customers andaccrued revenues relating to unbilled energy supplied to customers as of thebalance sheet date. Late fees arising from overdue electricity bills areaccounted for on a cash basis.

 

The allowance for doubtfulaccounts is recorded at an amount estimated by management as sufficient tocover probable losses, according to the ANEEL criteria, as follows: (i) forconsumers with significant debts, an individual analysis of the balance ismade, taking into account the history of default, negotiations in progress andthe existence of real guarantees; (ii) for other consumers, the debts thatare more than 90 days past due for residential consumers, or more than 180 dayspast due for commercial consumers, or more than 360 days past due for the otherconsumer types, are provisioned at 100%.

 

(g)           **Investmentsin affiliates** - The Company’s investments in affiliated companiesin which the Company has the ability to exercise significant influence, but notcontrol, are accounted for using the equity method of accounting.

 

(h)         **Property,plant and equipment and intangibles** — These assets are recordedat acquisition or construction cost. Interest and other financing charges,excluding foreign exchange losses, incurred during the construction period onthird-party financing are capitalized, in accordance with FASB ASC Subtopic835-20 - Capitalization of Interest Cost (FASB Statement No. 34 “Capitalizationof Interest Cost”). Expenditures for maintenance and repairs are charged tooperating costs as incurred. Materials to be used in construction are includedin electric generation, distribution and transmission assets under constructionin progress. The net results of disposals of fixed assets are recorded as partof operating income.

 

Property, plant and equipment are depreciated usingthe straight-line method, at annual rates based on the estimated useful life ofassets, in accordance with ANEEL regulations and industry practice adopted inBrazil, and residual value at the end of the concession period that will be atleast the book value of the property, plant and equipment. Under BrazilianGAAP, the residual value at the end of the concession, net of specialobligation (see note 2, item r), is equal to the amount to be reimbursed by theBrazilian government at that time.

 

Intangibles are amortized using the straight-linemethod until the end of the concession period.

 

The Company’s investments inconsortia (groups of organizations participating in joint ventures formed topromote common objectives or engage in projects to benefit all the memberswithout the creation of a legal entity), are recorded at acquisition orconstruction cost less allowance for loss, when applicable. Interest and other financing charges, excluding foreignexchange losses, incurred during the construction period on third-partyfinancing are capitalized, in accordance with FASB ASC Subtopic 835-20 (FASBStatement No. 34) . The consortium depreciation is computed on thestraight-line method, at annual rates determined by ANEEL, which represent theestimated useful lives of the consortia’s underlying assets. The consortiumexpenditures for maintenance and repairs are charged proportionally tooperating costs by the Company as incurred.

 

F-13

----

Table ofContents

 

(i)             **Impairmentof long-lived assets** - CEMIG follows FASB ASC Topic 360-10 (FASBStatement No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”). Whenever events or changes in circumstances indicate thatthe carrying value of long-lived assets may not be recoverable, CEMIG performscalculations of undiscounted cash flows expected to be derived from assets inservice to determine whether impairment has occurred. In the event such cashflows are not expected to be sufficient to recover the recorded value of theassets, such assets are written down to their estimated fair values based ondiscounted cash flow analysis. The Company has not recognized any impairment asa result of the application of this accounting policy for all periodspresented.

 

(j)                   **Research and Development and Advertising -**Research and development and advertising costs are expensed as incurred.Research and development costs amounted to R$27, R$25 and R$23 in 2009, 2008 and 2007, respectively. Advertising costsamounted to R$26, R$31 and R$26in 2009, 2008 and 2007, respectively.

 

(k)                **Revenues,costs and expenses** - Revenues, costs and expenses are recognized on anaccrual basis. Revenue is recognized when persuasive evidence of an arrangementexists, delivery of goods has occurred or services have been rendered, rateshave been fixed or are determinable, and collectability is reasonably assuredregardless of when cash is received.

 

Revenues from the sale of electricity generation are recorded basedupon the output delivered provided at rates as specified under contract termsor prevailing regulatory rates. Electricity distribution sales to finalcustomers are recognized when power is provided. Billings for these sales aremade on a monthly basis. Unbilled revenues from the billing cycle up to the endof each month are estimated based on the prior month’s billing and are accruedat the end of the month. Differences between estimated and actual unbilledrevenues, which historically have not been significant, are recognized in thefollowing month.

 

Use of basic transmission network revenues is recorded when earned andbilled monthly, according to the revenue established through the concessioncontracts. In certain contracts, revenues to be earned in the last 15 years are50.00% lower than those in the first 15 years of the concession. The Companyrecognizes revenue on these contracts on a straight-line basis, in accordancewith the nature of the services provided.

 

Revenues received by the Company from other concessionaires and freeconsumers using its basic transmission and distribution network are recognizedin the month that the network services are provided.

 

Services rendered include connection fees and other related servicesand the revenues are recognized when the services are provided.

 

Taxes on revenue consist of: (i) value-added tax (“VAT”), which isa state tax due on the sales to final customers, is billed to the consumers andrecorded as part 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 FASB ASC Topic740, Income Taxes (FASB Statement No. 109, Accounting for IncomeTaxes), which requires an asset and liability approach to recording current anddeferred. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

 

CEMIG adopted FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes(included in FASB ASC Topic 740, Income Taxes), on January 1, 2007, that prescribes a recognition threshold andmeasurement attribute for the financial statement of a tax position taken orexpected to be taken. This Interpretation resulted in increasedrelevance and comparability in financial reporting of income taxes because alltax positions accounted for in accordance with ASC Topic 740*,* will be evaluatedfor recognition, derecognition, and measurement using consistent criteria. Thisadoption did not result in any material adjustment in the financial statementsof the Company.

 

(m)           **Commitments and Contingencies** - Liabilitiesfor loss contingencies arising from claims, assessments, litigation, fines, andpenalties and other sources, are recorded when it is probable that a liabilityhas been incurred and the amount of the assessment can be reasonably estimated.Legal costs incurred in connection with loss contingencies are expensed asincurred.

 

F-14

----

Table ofContents

 

(n)             **Employees’benefit plans** - The Company sponsors a defined-benefit pensionplan and a defined-contribution plan covering substantially all of its employees.The Company has also established post-retirement health care plans and dentalplans and pays life insurance premiums for its retirees. The Company accountsand discloses information about pension plans and other postretirement benefitplans as required by according  to FASBASC Topic 715 — Compensation — Retirement Benefits - Defined (FASB Statement No. 87,“Employers’ Accounting for Pensions”, FASB Statement No. 106, “Employers’Accounting for Post-retirement Benefits Other Than Pensions” and FASB StatementNo. 132(R) “Employers’ Disclosures about Pensions and OtherPostretirement Benefits”).

 

Under Brazilian law, employees are entitled to a minimum of one-monthvacation upon conclusion of each year of service. CEMIG fully accrues thisliability based on the vested entitlement of the employees at each period end,plus related social security costs.

 

(o)         **Environmentaland remediation costs** - CEMIG, in accordance with FASB ASCSubtopic 410-30 Environmental Obligations (FASB Statement No. 143 — “Accountingfor Asset Retirement Obligations”) and 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 provideremediation costs when the responsibility to remediate is probable and theamount of associated costs is reasonable determinable. No provision withrespect to these matters has been required to date.

 

(p)         **Comprehensiveincome (loss)** - CEMIG reports comprehensive income (loss) inaccordance with FASB ASC Topic 220 — Comprehensive Income (FASB Statement No. 130,“Reporting Comprehensive Income”) and has elected to present it in thestatement of operations. The components of accumulated other comprehensive lossare as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Under-funded status of postretirement benefit  plans |       | (694     | )          | (1,077   | )          |
| Income tax                                           |       | 236      |       | 366      |       |
| Total accumulated other comprehensive loss           |       | (458     | )          | (711     | )          |

 

(q)         **Regulationand deferred regulatory assets and liabilities** - As a result of variousactions taken by the Federal Government and ANEEL in 2001, the Company ́sdistribution business is subject to the provisions of FASB ASC Topic 980 —Regulated Operations (FASB Statement No.  71 - Accounting for the Effectsof Certain Types of Regulation”). The rate-setting structure in Brazil isdesigned to provide for recovery of the Company’s allowable costs, includingthose incurred as a result of Federal Government-mandated power rationingmeasures imposed in 2001, as described further below. Accordingly, the Companycapitalizes incurred allowable costs as deferred regulatory assets wheninstructed by ANEEL and there is a probable expectation that future revenueequal to the costs incurred will be billed and collected as a direct result ofthe inclusion of the costs in an increased rate set by the regulator. Thedeferred regulatory asset is eliminated when the Company collects the relatedcosts through billings to customers at the increased rate. ANEEL performs arate review on an annual basis. If ANEEL excludes all or part of a cost fromrecovery, that portion of the deferred regulatory asset is impaired and isaccordingly reduced to the extent of the excluded cost. The Company has recordednet deferred regulatory assets that it expects to pass through to its customersin accordance with and subject to regulatory 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 “GeneralAgreement”) with the Federal Government that provided resolution torationing-related issues as well as to certain other electricity rate-relatedissues. The General Agreement provided for a rate increase intended toreimburse revenues lost as a result of the rationing program in 2001 and 2002.The increased rates were in force in the Company for a period of 74 months fromFebruary 2002. The amount was fully recovered in accordance with EmergingIssues Task Force (“EITF”) No. 92-7 “Accounting by Rate Regulated Utilities forthe Effects of Certain Alternative Revenue Programs” (included in FASB ASCSubtopic 980-605 Regulated Operations — Revenue Recognition).

 

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 the 

 

F-15

----

Table ofContents

 

concession contracts to the cost of purchased power and certain othercosts and taxes not controlled by the Company. ANEEL had granted rate increasesto recover a portion of previously deferred Parcel A costs. The GeneralAgreement provided a tracking account mechanism, created in October 2001through Executive Order No. 296, to record the variation in the Parcel Acosts for rate adjustment calculation purposes. Parcel A costs incurredprevious to January 1, 2001 are not recoverable through the trackingaccount. As a result, the Company has not recognized any regulatory asset forParcel A costs incurred prior to 2001, except for the system services chargesfrom September 2000 (as allowed by ANEEL). Parcel A costs started to becollected in March 2008. (See note 4).

 

(r)            **Special obligations -**Special obligationsrepresent contributions received by concessionaires from customers for thepurpose of expanding the electric distribution system. These contributions areincorporated into the Company’s distribution assets. For regulatory purposes,the depreciation of these assets was included in the tariff rate settingprocess and the corresponding liability was recorded for the amount of thetotal contributions. Under U.S. GAAP, the contributions were consideredreimbursements of construction costs and credited against the cost of therelated fixed assets.

 

On October 31, 2006, ANEEL issued a new regulation which changedthe treatment of special obligations with respect to the tariff settingprocess. The regulation establishes, among other items, that beginning on thedate of the next respective tariff revision (April 2008 for CEMIGDistribuição), the special obligations would be amortized as a reduction of netallowable costs over future periods, therefore reducing tariffs.

 

(s)          **Earnings per share -**TheCompany presents its earnings per share in accordance with FASB ASC Topic220 - Earnings Per Share (SFAS No. 128“Earnings Per Share”) using the two class method. Basic earnings per share is computed by dividing net income by theweighted average number of common and preferred shares outstanding during theyear. Diluted earnings per share is computed in a manner consistent with thatof basic earnings per share while giving effect to all potentially dilutivecommon and preferred shares that were outstanding during the year.

 

(t)           **Segmentinformation** — FASB ASC Topic280 — Segment Reporting (SFAS No. 131“Disclosures about Segments of Enterprise and Related Information”) requires that a business enterprisesupplementally disclose certain financial information about its various anddistinct operating activities. Such information is to be presented from thepoint of view of how operating and financial decisions are made for eachbusiness sector. The Company has adopted ASC Topic 280 for all years presented, as furtherdisclosed in Note 33.

 

(u)         **Derivativesand hedging activities** - As required by FASB ASC Topic 815 - Derivatives and Hedging (SFAS No 133 -Accounting for Derivative Instruments and Hedging Activities) derivativefinancial instruments are being recorded based on their fair values as assetsor liabilities in the accompanying balance sheet, and corresponding changes infair value are being recognized in earnings. Hedge accounting has not beenapplied to any of the Company’s derivative financial instruments. The Companycalculates the fair value of financial instruments using quoted market priceswhenever available. When quoted market prices are not available, the Companyuses standard pricing models with market-based inputs, which take into accountthe present value of estimated future cash flows.

 

(v)         **Fair Value Measurements -**OnJanuary 1, 2008, the Company adopted the provisions of FASB Statement No. 157,Fair Value Measurements, (included in ASC Topic 820, Fair Value Measurementsand Disclosures), for fair value measurements of financial assets and financialliabilities and for fair value measurements of nonfinancial items that arerecognized or disclosed at fair value in the financial statements on arecurring basis. ASC Topic 820defines fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date and also establishes a framework for measuring fairvalue and expands disclosures about fair value measurements (Note 25). FASBStaff Position FAS 157-2, “Effective Date of FASB Statement No. 157”(included in FASB ASC Section 820-10-65— Transition and Open Effective Date Information) postponed the effective dateof Statement 157 until fiscal years beginning after November 15, 2008 forall nonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis.

 

On January 1, 2009, the Company was required toapply the provisions of ASC Topic 820 to fair value measurements ofnonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis.The adoption of FAS 157-2 did not result in any adjustment to the financial statements of theCompany.

 

In October 2008, the FASB issued FASBStaff Position FAS 157-3, “Determining the Fair Value of a Financial Asset Whenthe Market for That Asset is Not Active,”which was effective immediately. FSP FAS 157-3 clarifies the applicationof Statement 157 in cases where themarket for a financial instrument is not active and provides an

 

F-16

----

Table of Contents

 

example to illustrate key considerations indetermining fair value in those circumstances. The Company has consideredthe guidance provided by FSP FAS 157-3 in its determination of estimated fairvalues during 2009 and 2008.

 

(w)       **Fair Value Option -**EffectiveJanuary 1, 2008, the Company adopted the provisions of FASB ASC Topic 825 — Financial Instruments (FASBStatement No.159 - “The Fair Value Option for Financial Assets and FinancialLiabilities”). ASC Topic 825 gives theCompany the irrevocable option to report most financial assets and financialliabilities at fair value on an instrument-by-instrument basis, with changes infair value reported in earnings. Fair value option has not been elected - forany of the Company’s financial assets and liabilities.

 

(x)           **Recently Issued Accounting Pronouncements**

 

·            ***Transfers and Servicing (ASC 860), Accounting forTransfers of Financial Assets (ASU******2009******-16)***

 

TheFASB issued ASU 2009-16, Transfers and Servicing (Topic 860): Accounting forTransfers of Financial Assets (FASB Statement No. 166, Accounting forTransfers of Financial Assets — an amendment of FASB Statement No. 140) inDecember 2009. ASU 2009-16 removes the concept of a qualifying specialpurpose entity (QSPE) from ASC Topic 860, Transfers and Servicing, and theexception from applying ASC 810-10 to QSPEs, thereby requiring transferors offinancial assets to evaluate whether to consolidate transferees that previouslywere considered QSPEs. Transferor imposed constraints on transferees whose solepurpose is to engage in securitization or asset backed financing activities areevaluated in the same manner under the provisions of the ASU as transferorimposed constraints on QSPEs were evaluated under the provisions of Topic 860prior to the effective date of the ASU when determining whether a transfer offinancial assets qualifies for sale accounting. The ASU also clarifies theTopic 860 sale accounting criteria pertaining to legal isolation and effectivecontrol and creates more stringent conditions for reporting a transfer of aportion of a financial asset as a sale. The ASU is effective for periodsbeginning after December 15, 2009, and may not be early adopted. TheCompany expects that the adoption of ASU 2009-16 will not have a materialimpact on its consolidated financial statements.

 

·            ***Consolidation (ASC 810), Improvements to FinancialReporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17)***

 

The FASB issued ASU 2009-17,Consolidations (Topic 810): Improvements to Financial Reporting by EnterprisesInvolved with Variable Interest Entities (FASB Statement No. 167, *Amendments to FASB Interpretation No. 46(R)*) inDecember 2009. ASU 2009-17, which amends the Variable Interest Entity(VIE) Subsections of ASC Subtopic 810-10, Consolidation — Overall, revises thetest for determining the primary beneficiary of a VIE from a primarilyquantitative risks and rewards calculation based on the VIE’s expected lossesand expected residual returns to a primarily qualitative analysis based onidentifying the party or related party group (if any) with (a) the powerto direct the activities that most significantly impact the VIE’s economicperformance and (b) the obligation to absorb losses of, or the right toreceive benefits from, the VIE that could potentially be significant to theVIE. The ASU requires kick out rights and participating rights to be ignored inevaluating whether a variable interest holder meets the power criterion unlessthose rights are unilaterally exercisable by a single party or related partygroup. The ASU also revises the criteria for determining whether fees paid byan entity to a decision maker or another service provider are a variableinterest in the entity and revises the Topic 810 scope characteristic thatidentifies an entity as a VIE if the equity-at-risk investors as a group do nothave the right to control the entity through their equity interests to addressthe impact of kick out rights and participating rights on the analysis.Finally, the ASU adds a new requirement to reconsider whether an entity is aVIE if the holders of the equity investment at risk as a group lose the power,through the rights of those interests, to direct the activities that mostsignificantly impact the VIE’s economic performance, and requires a company toreassess on an ongoing basis whether it is deemed to be the primary beneficiaryof a VIE. ASU 2009-17 is effective for periods beginning after December 15,2009 and may not be early adopted. The Company expects that the adoption of ASU2009-17 will not have a material impact on its consolidated financialstatements.

 

·            ***Codification***

 

The Financial AccountingStandards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-01in June 2009. This Update, also issued as FASB Statement of FinancialAccounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles,” is effectivefor financial statements issued after September 15, 2009. Update 2009-01requires that the FASB’s Accounting Standards Codification (ASC) become thesole source of authoritative U.S. generally accepted accounting principlesrecognized by the FASB for nongovernmental entities. The Codification is meantto simplify user access to all authoritative

 

F-17

----

Table of Contents

 

GAAP by reorganizing GAAPpronouncements into roughly 90 accounting topics within a consistent structure.All previous level (a)-(d) US GAAP standards issued by a standard setteris superseded. Level (a)-(d) US GAAP refers to the previous accountinghierarchy. All other accounting literature not included in the Codification isnonauthoritative. Following this Statement, the Board will not issue newstandards in the form of Statements, FASB Staff Positions, or Emerging IssuesTask Force Abstracts. Instead, it will issue Accounting Standards Updates. TheBoard will not consider Accounting Standards Updates as authoritative in theirown right. Accounting Standards Updates will serve only to update theCodification. CEMIG adopted this Update effective July 1, 2009.

 

**3. ACCOUNT RECEIVABLE FROM MINASGERAIS STATE GOVERNMENT**

 

On March 4, 1993,the Company recorded a receivable with a corresponding credit in the statementof operations, from the Federal Government relating to the remaining balance ofthe amount of return guaranteed by the regulatory agency and the actual returnrecorded by the Company prior to that date. During 1993 and 1994, the Companyrecovered part of the rate shortfall by offsetting amounts due to FederalGovernment-owned entities arising from purchased power and financing. On May 2,1995, the obligation to pay the remaining balance of this receivable amountingto R$602, was transferred from the Federal Government to the State Government,the Company’s controlling shareholder, through a credit assignment contract(the “CRC Agreement”). In connection with this assignment, the State Governmentagreed to pay the amount due to the Company over 20 years, with an initialthree-year grace period, as restated based on the UFIR (Tax Reference UnitIndex) plus interest of 6% per year. In the event that the Company receivespayments or retains declared dividends to offset amounts receivable, theCompany is obligated to issue shares to all shareholders in proportion to theirshareholdings, transferring the principal amount of the related paidinstallments from Appropriated retained earnings - Rate shortfall reserve toCapital Stock.

 

The CRC Agreement wasmodified by certain amendments commencing in 2001 that addressed issuesrelating to remuneration of the receivable and certain guarantees relating todividend retention by the State government. Prior to the Fourth Amendment  described below, a portion of the receivable wasnot guaranteed by the State Government. Consequently, the Company hadrecognized a provision amounting to the full unguaranteed amount which wasR$1,845 as of December 31, 2004.

 

**a) Fourth Amendment to the CRCAgreement**

 

TheExtraordinary Shareholders Meeting which commenced on December 30, 2005,and ended on January 12, 2006, approved the Fourth Amendment to the CRCAgreement which extended the guarantee relating to dividends payable to theState Government to the full balance receivable and changed the remuneration toIGP-DI plus annual interest of 8.18% per year. The balance is payable in 61semi-annual installments which are due on June 30 and December 31 ofeach year, retroactively as from December 2004. The payments are beingmade by withholding 65.00% of the regular dividends and interest on capital dueto the State Government. The dividends withheld are being used in the followingorder: (i) the settlement of past due installments, (ii) thesettlement of the semi-annual installments, (iii) the pre-payment of up to2 installments; and (iv) the payment of the remaining principal.

 

OnDecember 31, 2009, the amount of R$80 (R$73 on December 31, 2008) hadbeen received in advance of the contract coming due on June 30 and December 31,2010.

 

**b)****Creation of CEMIG CRC Account SecuritizationFund**

 

In January 2006,the Company created the CEMIG CRC Account Securitization Fund (FIDC) andassigned the accounts receivable underthe CRC Account Agreement to the fund. The book value of the CRC Accountreceivables that were transferred to the FIDC in January 2006 was R$1,659.A portion of the FIDC was used by the Company to obtain R$900 in financing inthe form of senior quotas issued by the FIDC. The senior quotas accrue interestbased on CDI plus 1.7% per year and are being amortized in 20 semi-annualinstallments. The senior quotas were acquired by financial institutions and areguaranteed by CEMIG. Consequently, the FIDC is fully consolidated by theCompany and the senior quotas are recorded as Long-term financing.

 

Thechanges to amounts receivable in connection with the CRC Account SecuritizationFund in 2009 and 2008 were as follows:

 

F-18

----

Table of Contents

 
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Opening balance                                                         |       | 1,801                 |       | 1,763 |   |
| Monetary updating on the senior quotas                                  |       | 104                   |       | 128 |   |
| Monetary updating on the subordinated quotas                            |       | 45                    |       | 26 |   |
| Funds received — subordinated quotas                               |       | 17                    |       | 13 |   |
| Amortization of the senior quotas                                       |       | (143                  | )          | (128 | ) |
| Amortization of the subordinated quotas                                 |       | —                |       | (1 | ) |
| Balance at December 31,                                            |       | 1,824                 |       | 1,801 |   |
|                                                                    |       |                  |       |   |   |
| Composition of the CRC Account Securitization Fund  at December 31 |       |                  |       |   |   |
| - Senior quotas held by third parties                                   |       | 951                   |       | 990 |   |
| - Subordinated quotas held by CEMIG                                     |       | 791                   |       | 738 |   |
| - Dividends held by the Fund                                            |       | 82                    |       | 73 |   |
| TOTAL                                                                   |       | 1,824                 |       | 1,801 |   |

 

The dividends to be distributed toshareholders arising from net income recorded for the period ended of December 31,2009, declared by the Executive Board and the Board of Directors, in accordancewith the Company ́s Bylaws, are recorded as Current liabilities. Of thedividends to be distributed, R$207 is payable to the government of the State ofMinas Gerais, and R$135 will be retained for settlement of part of the CRCAgreement.

 

Inconnection with the Fourth Amendment, the Company committed to comply withfinancial covenants which are calculated based on the financial statementsprepared in accordance with Brazilian GAAP:

 
| **Target  Description —According to Brazilian GAAP**     | ** ** | **Index Required**                      |
|---------------------------------------------------------------|------------|-----------------------------------------|
| Indebtedness  (1)/EBTIDA (2)                                  |       | Less  than 2                            |
| Indebtedness(1) /  Indebtedness plus Shareholders Equity |       | Less  than or equal to 40.00%           |
| Capital  expenditures                                         |       | Less  than or equal to 40.00% of EBTIDA |

 

----

(1) Indebtedness = total consolidated short-term and long-termfinancing

(2) EBTIDA = Earnings before interest, income taxes, depreciationand amortization.

 

During the Extraordinary Shareholders’ GeneralMeeting held on May 28, 2009, the shareholders agreed to revise the restrictiveclause “capital expenditure” to increase the rate from 40% to 125.00% of EBTIDAdue to   the capital expendituresoccurred in 2009 in connection with implementation of the investment program ofthe Company. The Company complied with all the restrictive covenants for theyear ended on December 31, 2009.

 

**4. DEFERRED REGULATORY ASSETS AND LIABILITIES**

 

The components of thedeferred regulatory assets and liabilities are as follows:

 
| ** **                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                                                                                        |       |                  |       |   |   |
| Energy transactions on  Câmara de Comercialização de Energia Elétrica — CCEE (“CCEE/MAE”) during the  rationing plan (a) |       | 46                    |       | 38 |   |
| Provision for loss on  Transactions on the CCEE/MAE                                                                                                         |       | —                |       | (26 | ) |
|                                                                                                                                                        |       |                  |       |   |   |
|                                                                                                                                                        |       | 46                    |       | 12 |   |
| Additional  Parcel A costs:                                                                                                                                 |       |                  |       |   |   |
| - Period from  January 1, 2001 to October 25, 2001 (b.1)                                                                                          |       | 227                   |       | 515 |   |
| - Period from  October 26, 2001 and thereafter (b.2)                                                                                                   |       | 50                    |       | 380 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Deferred rate  adjustment (c)                                                                                                                               |       | —                |       | 133 |   |
| PIS-PASEP/COFINS (d)                                                                                                                                        |       | —                |       | 46 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Tariff review of Cemig  Distribuição (note 26)                                                                                                    |       | —                |       | (214 | ) |
| Transmission tariff review of CEMIG Geração e Transmissão (note 27)                                                                          |       | 119                   |       | — |   |
|                                                                                                                                                        |       |                  |       |   |   |
|                                                                                                                                                        |       | 442                   |       | 872 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Current assets                                                                                                                                              |       | 346                   |       | 754 |   |
| Other assets                                                                                                                                                |       | 96                    |       | 332 |   |
| Current liabilities                                                                                                                                         |       | —                |       | (214 | ) |

 

Theregulatory assets related to the Energy Rationing Plan, Energy transactions onCCEE/MAE and additional Parcel A costs bear interest at the SELIC (Brazilianbenchmark interest rate) rate. The deferred rate adjustment andPIS-PASEP/COFINS regulatory assets were restated based on IGP-M (General MarketPrice Index). These assets are being

 

F-19

----

Table of Contents

 

recoveredbased on the rate adjustment on April 8, 2009. CEMIG estimates theremaining recovery period for these assets at December 31, 2009 to besubstantially less than 24 months.

 

TheCompany has not recorded VAT related to the above items. The VAT, amounting toR$12 as of December 31, 2009 (R$36 as of December 31, 2008), will beassessed when these amounts are invoiced to the customers as a gross-up to therevenue invoiced. The VAT collected will then be passed on to the state taxauthorities, resulting in no effect on net operating revenues. VAT is notassessed on Parcel A costs and PIS-PASEP/COFINS.

 

(a) Energy transactions on CCEE/MAE during therationing plan

 

Thereceivable refers to the difference between the prices paid by CEMIG in theCCEE/MAE energy transactions, during the energy rationing period and the amount of R$49.26/MWh that is recoveredthrough the extraordinary rate adjustment (“RTE”), as defined in the GeneralAgreement of the Electricity Sector. Distributionconcessionaires collect andtransfer, on a monthly basis, the special rate adjustment amounts togenerators and distributors,including CEMIG. The Company has maintained a receivable balance since March 2003.

 

Theconclusion of certain lawsuits filed by other generators that are still inprogress may result in future changes in the amounts recorded. The Company iscurrently unable to determine the likely outcome of this uncertainty.

 

Revision of amounts by ANEEL

 

OnDecember 15, 2009, ANEEL issued Regulatory Resolution no 387/2009 whichestablishes a new method for calculating the outstanding balances of Loss ofRevenue and Free Energy after expiry of the RTE charge, with the aim to fairlydistribute the amounts of RTE charged from the final consumer, so as to spreadthe losses incurred evenly between generators and distributors of electricenergy.

 

On the basis of this newcalculation, CEMIG Geração e Transmissão will receive from the distributors ofelectric energy relating to free energy the amount of R$37.

 

Therights of CEMIG Geração e Transmissão are updated by the variation in the SELICrate plus 1.00% interest per year.

 

Write-off

 

In2009, the Company wrote-off the amount of R$37 relating to receivables whichhave no chance of being passed by some distributors due to the termination ofthe validity of recovery from RTE in their concession areas.

 

(b) Recoveryof additional Parcel A costs:

 

(b.1) Additional Parcel A Costs from January 1, 2001 to October 25, 2001

 

The base amount of Parcel A costs to be reimbursedis equal to the difference between the Parcel A costs actually incurred and theestimated Parcel A costs used for purposes of computing the last annual rateadjustment prior to the Energy Rationing Plan. This amount bears interest atthe SELIC rate from the day that the actual cost was paid until the date ofrecovery.

 

The recovery of the Parcel A costs began in March 2008,immediately after the ending of the period of recovery of RTE, using the same mechanisms.

 

Whenthe amounts of Parcel A costs are received in the tariff, the Company transfersthe corresponding amount, posted in assets, to the income statement. The tablebellow shows the amounts transferred:

 
| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| **Amounts  transferred to expenses**                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Electricity purchased for resale                                 |       | 196                   |       | 161 |   |
| Fuel usage quota                                                 |       | 87                    |       | 71 |   |
| Global reserve for reversion quota                               |       | 9                     |       | 7 |   |
| Tariff for transport of electricity from Itaipu                  |       | 3                     |       | 3 |   |
| Tariff for use of the transmission facilities of  the basic grid |       | 22                    |       | 18 |   |
| Charges for use of water resources                               |       | 8                     |       | 6 |   |
| Energy Service Inspection fee                                    |       | 1                     |       | 1 |   |
|                                                             |       |                  |       |   |   |
|                                                             |       | 326                   |       | 267 |   |

 

F-20

----

Table of Contents

 

(b.2) AdditionalParcel A Costs from October 26, 2001 and thereafter

 

OnOctober 25, 2001, the Federal Government, through Executive Act No 296,created a tracking account mechanism to control the variation of Parcel A costsfor rate adjustment calculation purposes. This account is comprised of theamounts resulting from the difference between the Parcel A costs actuallyincurred, from October 26, 2001 and thereafter, and the estimated Parcel Acosts used for purposes of computing the annual rate adjustment on April 8.

 

Theamounts determined for the Parcel A costs for the period from October 26,2001 and thereafter are recorded as deferred regulatory assets, as follows:

 
| ** **                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|
| **Parcel  A****Items**                                                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                     |       |                  |       |   |   |
| System service charges                                                   |       | 32                    |       | 158 |   |
| Electricity purchase rate                                                |       | (222                  | )          | 110 |   |
| Itaipu Binacional electricity transport rate                             |       | 9                     |       | 5 |   |
| Fuel usage quota — CCC                                              |       | 91                    |       | 61 |   |
| Rate for use of basic transmission network                               |       | 97                    |       | 28 |   |
| Energy development  account quota — CDE                             |       | 24                    |       | 10 |   |
| Charges for use of  water resources                                      |       | 4                     |       | 3 |   |
| Incentive program for  Alternative Electric Power Sources — PROINFA |       | 15                    |       | 5 |   |
|                                                                     |       |                  |       |   |   |
|                                                                     |       | 50                    |       | 380 |   |

 

The Company wrote-off the amount of R$71 related toParcel A costs from the previous years that it will not be collected.

 

The above-mentioned amounts are restated based onthe SELIC through annual rate adjustments.

 

(c) Deferred rate adjustment

 

ANEEL Resolution No. 71,dated April 4, 2004, determined that the rate adjustment that should havebeen applied to the Company’s rates on April 8, 2003 was 44.41%, insteadof 31.53% which was originally applied.The percentage difference of 12.88% (in absolute terms) was offset through anincrease of R$301, in April 2003 values, in each one of the tariffadjustments scheduled to take place in 2004 through 2008, includingmonetary restatement calculated based on IGP-M variation plus 11.26% interest.The outstanding amount of R$133 at December 31, 2008 was collected in2009.

 

(d) PIS-PASEP/COFINS

 

TheFederal Laws No. 10,637 and 10,833, increased the rates and changed thebasis of calculation of PIS/PASEP and COFINS taxes on revenues. As a result ofthose changes, there was an increase in expense relating to PIS/PASEP andCOFINS, from December 2002 to June 2005 and from February of2004 to June 2005, respectively.

 

In view of the fact thatthis increase in the expense should be repaid to the Company through tariffs,the credits were registered, in accordance with a criteria defined by ANEEL, asa regulatory asset, and there was a counterpart reduction in the expense onPIS/PASEP and COFINS taxes.

 

In 2009, the Company decidedto write off the credits of PIS and COFINS in the amount of R$46 due to thenon-inclusion by ANEEL of this asset in the Tariff Adjustment made in March 2010and the uncertainty on realization of this asset in the subsequent tariffadjustments.

 

**5. INCOME TAXES**

 

Incometaxes in Brazil include federal income tax and social contribution tax onincome (which is an additional federal income tax). The statutory annual ratesapplicable are 25% for federal income tax and 9% for social contribution tax.

 

Theincome taxes are calculated on an individual basis for each subsidiary andcannot be consolidated according to the Brazilian tax law.

 

F-21

----

Table of Contents

 

(a) Incometax reconciliation:

 

The amounts reported as income tax expense in thefinancial statements are reconciled to the statutory rates as follows:

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                           |       |                             |       |   |   |   |   |
| Income before taxes            |       | 2,575                            |       | 2,508 |   | 2,303 |   |
|                           |       |                             |       |   |   |   |   |
| Income tax expense  (34%)      |       | (876                             | )          | (853 | ) | (783 | ) |
| Effects of:                    |       |                             |       |   |   |   |   |
| Income tax benefit (expense)-  |       |                             |       |   |   |   |   |
| Equity in Investees            |       | 56                               |       | 70 |   | 77 |   |
| Change in valuation  allowance |       | —                           |       | — |   | 14 |   |
| Interest on Capital (1)        |       | (16                              | )          | — |   | — |   |
| Others                         |       | 29                               |       | 28 |   | 7 |   |
|                           |       |                             |       |   |   |   |   |
| Income tax expense             |       | (807                             | )          | (755 | ) | (685 | ) |
|                           |       |                             |       |   |   |   |   |
| Current tax expense            |       | (830                             | )          | (973 | ) | (941 | ) |
| Deferred tax benefit           |       | 23                               |       | 218 |   | 256 |   |
|                           |       |                             |       |   |   |   |   |
| Income tax expense             |       | (807                             | )          | (755 | ) | (685 | ) |

 

The effective tax rates are 31% in 2009 and 30% in 2008 and 2007.

 

----

(1) Brazilian companies arepermitted to pay interest on capital. The calculation is based on the shareholders’equity amounts prepared in accordance with Brazilian GAAP. The interest rateapplied may not exceed the long-term interest rate determined by the BrazilianCentral Bank and interest paid may not exceed the greater of 50% of net incomefor the year or 50% of retained earnings plus profit reserves.

 

The amount of interest on capital is deductible for income taxespurposes. Accordingly, as opposed to a payment of dividends, the benefit toCEMIG is a reduction in its income taxes payable equivalent to the statutorytax rate applied to such amount. The interest on capital is recorded in tax andaccounting books as financial income, when declared by subsidiaries, and asfinancial expense when declared to be paid to shareholders. However, forfinancial statement presentation purposes, the Company considers the substanceof the transaction. As such, interest on capital is considered as dividendsreceived or paid, with no effect in the statements on income. In the financialstatements, those dividends are reclassified, which means that interest oncapital received is credited to investments and interest on capital paid isdebited to retained earnings, while the income tax effects remain in statementof operations.

 

(b) Analysisof deferred tax balances:

 

As of December 31, 2009 and 2008, the deferredtax balances have been computed using a 34% rate, which is the enacted tax rateexpected to be in force upon realization. The major components of the deferredincome taxes accounts in the consolidated balance sheets are as follows:

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax Assets:                                                                 |       |                  |       |   |   |
| Tax loss carryforwards                                                               |       | 441                   |       | 508 |   |
| Employee  post-retirement benefits                                                   |       | 166                   |       | 306 |   |
| Provision for  contingencies                                                         |       | 183                   |       | 126 |   |
| Provision for doubtful  accounts                                                     |       | 100                   |       | 88 |   |
| Other temporary  differences                                                         |       | —                |       | 32 |   |
|                                                                                 |       |                  |       |   |   |
| Total gross deferred  tax assets                                                     |       | 890                   |       | 1,060 |   |
|                                                                                 |       |                  |       |   |   |
| Offset balance between  assets and liabilities                                       |       | (67                   | )          | (140 | ) |
|                                                                                 |       |                  |       |   |   |
| Valuation allowance on  realization of deferred tax balances                         |       | (408                  | )          | (437 | ) |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax assets                                                              |       | 415                   |       | 483 |   |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax  Liabilities:                                                           |       |                  |       |   |   |
| Temporary difference on  regulatory assets                                           |       | (40                   | )          | (2 | ) |
| Effects of differences  between book and tax basis of property, plant and equipment. |       | (267                  | )          | (276 | ) |
| Other temporary  differences                                                         |       | (3                    | )          | (10 | ) |
|                                                                                 |       |                  |       |   |   |
| Total gross deferred  tax liabilities                                                |       | (310                  | )          | (288 | ) |
|                                                                                 |       |                  |       |   |   |
| Offset balance between  liabilities and assets                                       |       | 67                    |       | 140 |   |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax  liabilities                                                        |       | (243                  | )          | (148 | ) |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax asset                                                               |       | 172                   |       | 335 |   |
|                                                                                 |       |                  |       |   |   |
| Current Assets                                                                       |       | 82                    |       | 48 |   |
| Other Assets                                                                         |       | 333                   |       | 435 |   |
| Current Liabilities                                                                  |       | (27                   | )          | — |   |
| Long-term Liabilities                                                                |       | (216                  | )          | (148 | ) |

 

F-22

----

Table of Contents

 

In assessing the recoverability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax-planning strategies inmaking this assessment. Based on the level of historical taxable income andprojections for future taxable income over the periods for which deferred taxassets are deductible, management believes that it is more likely than not thatthe Company will realize the benefits of these deductible differences, net ofexisting valuation allowance at December 31, 2009. The amount of thedeferred tax assets considered realizable; however, could be reduced in thenear term if estimates of future taxable income are reduced.

 

Tax loss carryforwards of R$1,297 as of December 31,2009 may be offset against a maximum of 30% of annual taxable income and do notexpire under Brazilian tax law.

 

Considering, as mentioned before, that theBrazilian Tax Law permits companies to benefit from the payment of interest oncapital and deduct such payments from their taxable income, the Company adoptedthe tax position of paying interest on capital to their shareholders. Accordingto the Company’s tax planning strategy, after utilizing a balance ofwithholding taxes currently recorded as “Recoverable Taxes” in the next fewyears, the Company will distribute interest on capital in an amount that willreduce the taxable income to close to or equal to zero.  As a consequence, this alternative shouldeliminate the payment of the income and social contribution taxes by CemigHolding and the tax loss carryforwards would not be recovered.

 

As previously mentioned, the Company considers thepayment of interest on capital as part of its tax-planning strategies and alsoconsiders that the payment of interest on capital in the future is a betteralternative than the recovery of its tax loss carryforwards. Therefore, theCompany recorded a valuation allowance in its Financial Statements in theamount of R$408 as of December 31, 2009 related to tax loss carryforwardsnot expected to be recovered.

 

The Company adopted the provisions of ASC Topic 740on January 1, 2007 andrecognizes the effect of income tax positions only if those positions are morelikely than not of being sustained. Recognized income tax positions aremeasured at the largest amount that is greater than 50% likely of beingrealized. Changes in recognition or measurement are reflected in the period inwhich the change in judgment occurs. Upon the implementation of ASC Topic 740,the Company did not record any further adjustments related to uncertainty inincome taxes, beyond those already recorded. A reconciliation of the beginningand ending amount of unrecognized tax benefits is as follows:

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  January 1,                     |       | 44       |       | 32       |       | 28       |       |
| Increase related to  current year tax positions |       | 4        |       | 4        |       | 4        |       |
| Increase related to  prior year tax positions   |       | —   |       | 8        |       | —   |       |
|                                            |       |     |       |     |       |     |       |
| Balance at  December 31,                   |       | 48       |       | 44       |       | 32       |       |

 

Included in the balance of total unrecognized taxbenefits at December 31, 2009 and 2008, are potential benefits of R$48 andR$44 respectively, if recognized, would affect the effective rate on incomefrom continuing operations. The Company recorded R$6 and R$12 of interest andpenalties related to unrecognized tax benefits during 2009 and 2008 in thestatements of operations. Total amount of interest and penalties accrued as of December 31,2009 and 2008 was R$40 and R$34, respectively.

 

F-23

----

Table of Contents

 

The Company and its subsidiaries file federalincome tax returns only in Brazil (except Transchile Charrua Transmission S.A.which domiciled in Chile and is in a start-up phase). The Company is no longersubject to Brazilian federal income tax examinations for years before 2004. Allincome before taxes and related income taxes are from Brazilian sources. Themain lawsuits challenged by the Brazilian Revenue Service are described in note17. Management, based on the opinion of the legal counsel, considers that thereare no significant risks that are not covered by liabilities already recordedor that would result in a material change to its financial position or resultsof operations. The Company does not expect that the total amounts ofunrecognized tax benefits will significantly increase or decrease within thenext 12 months.

 

The Company’s policy is to record penalties andinterests related to unrecognized tax benefits as financial expenses in theconsolidated statements of income.

 

**6. CASH AND CASH EQUIVALENTS**

 

The following table setsforth amounts of cash and cash equivalents for the dates indicated:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                              |       |                  |       |   |   |
| Cash on hand and in banks                         |       | 93                    |       | 171 |   |
| Cash equivalents,  mainly certificates of deposit |       | 3,811                 |       | 1,798 |   |
|                                              |       |                  |       |   |   |
|                                              |       | 3,904                 |       | 1,969 |   |

 

Cashand cash equivalents consist of transactions with Brazilian financialinstitutions, contracted on normal market conditions and at normal market rates.These are highly liquid, able to be converted into a known amount of cash andare subject to an insignificant risk of change of value.

 

**7. ACCOUNTS RECEIVABLE, NET**

 

The following table setsforth information concerning accounts receivable:

 
| ** **                       | ** ** | **As  of December 31, 2009** | ** ** | ** **    | ** ** | ** **   | ** ** |
|----------------------------------|------------|-----------------------------------|------------|---------------|------------|--------------|------------|
| ** **                       | ** ** | ** **                        | ** ** | **Past-due**  | ** ** | **Total**    | ** ** |
| ** **                       | ** ** | ** **                        | ** ** | **Up  to 90** | ** ** | **Over  90** | ** ** | **December 31,** | ** ** |
| ** **                       | ** ** | **Current**                       | ** ** | **days**      | ** ** | **days**     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
| Residential                      |       | 394                               |       | 146           |       | 81           |       | 621 |   | 544 |   |
| Industrial                       |       | 302                               |       | 42            |       | 356          |       | 700 |   | 688 |   |
| Commercial                       |       | 222                               |       | 46            |       | 70           |       | 338 |   | 298 |   |
| Rural                            |       | 64                                |       | 18            |       | 19           |       | 101 |   | 102 |   |
| Governmental entities            |       | 74                                |       | 15            |       | 48           |       | 137 |   | 165 |   |
| Public services                  |       | 112                               |       | 5             |       | 5            |       | 122 |   | 58 |   |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
| Subtotal                         |       | 1,168                             |       | 272           |       | 579          |       | 2,019 |   | 1,855 |   |
| Distributors                     |       | 174                               |       | 17            |       | 9            |       | 200 |   | 111 |   |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
|                             |       | 1,342                             |       | 289           |       | 588          |       | 2,219 |   | 1,966 |   |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
| Allowance for doubtful  accounts |       | —                            |       | —        |       | (238         | )          | (238 | ) | (244 | ) |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
|                             |       | 1,342                             |       | 289           |       | 350          |       | 1,981 |   | 1,722 |   |
|                             |       |                              |       |          |       |         |       |   |   |   |   |
| Current assets                   |       |                              |       |          |       |         |       | 1,949 |   | 1,705 |   |
| Other non-current assets         |       |                              |       |          |       |         |       | 32 |   | 17 |   |

 

No single customer represented more than 10% oftotal receivables as of December 31, 2009 and 2008 or of electricity salesto final customers for the years ended December 31, 2009, 2008 and 2007.

 

F-24

----

Table of Contents

 

Theallowance for doubtful accounts, by class of customer, is as follows:

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                   |       |                             |       |   |   |
| Residential            |       | 83                               |       | 68 |   |
| Industrial             |       | 40                               |       | 79 |   |
| Commercial             |       | 77                               |       | 62 |   |
| Rural                  |       | 14                               |       | 14 |   |
| Governmental  entities |       | 19                               |       | 16 |   |
| Public  services       |       | 5                                |       | 5 |   |
|                   |       |                             |       |   |   |
|                   |       | 238                              |       | 244 |   |

 

The changes in allowance for doubtful accounts wereas follows:

 
| ** **                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         |       |                             |       |   |   |   |   |
| Balance at beginning of  the year            |       | 244                              |       | 295 |   | 297 |   |
| Accounts written off                         |       | (19                              | )          | (108 | ) | (95 | ) |
| Additional charged to  other operating costs |       | 13                               |       | 57 |   | 93 |   |
|                                         |       |                             |       |   |   |   |   |
| Balance at end of the  year                  |       | 238                              |       | 244 |   | 295 |   |

 

F-25

----

Table of Contents

 

**8. RECOVERABLE TAXES**

 

The following table setsforth amounts of taxes recoverable for the dates indicated:

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                       |       |                  |       |   |   |
| Current assets -           |       |                  |       |   |   |
| Income tax                 |       | 335                   |       | 311 |   |
| Social contribution tax    |       | 112                   |       | 120 |   |
| VAT (ICMS)                 |       | 197                   |       | 159 |   |
| PIS-PASEP                  |       | 21                    |       | 14 |   |
| COFINS                     |       | 98                    |       | 65 |   |
| Other                      |       | 5                     |       | 3 |   |
|                       |       |                  |       |   |   |
|                       |       | 768                   |       | 672 |   |
|                       |       |                  |       |   |   |
| Other non-current assets - |       |                  |       |   |   |
| Income tax                 |       | 100                   |       | 163 |   |
| Social contribution tax    |       | 11                    |       | 11 |   |
| VAT (ICMS)                 |       | 57                    |       | 79 |   |
| PIS-PASEP                  |       | 42                    |       | — |   |
|                       |       |                  |       |   |   |
|                       |       | 210                   |       | 253 |   |

 

The Income and Social Contribution Tax credits refer to amountscalculated in the Company’s previous year’s tax returns, and advance paymentsmade in 2009, which will be compensated in the Income and Social Contributiontaxes payable in 2010.

 

Thecredits of VAT (ICMS) recoverable, recorded as Other Non-Current Assets, arisefrom acquisitions of fixed assets and are realized in 48 months.

 

 

**9.INVESTMENTS IN AFFILIATES**

 

The following table describes the Company’s equityinvestments:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**              | ** ** | **2008** | ** ** |
|              |       |                  |       |   |   |
| TAESA             |       | 1,058                 |       | — |   |
| EATE              |       | 511                   |       | 183 |   |
| GASMIG            |       | 431                   |       | 320 |   |
| Light             |       | 377                   |       | — |   |
| Rio Minas Energia |       | —                |       | 303 |   |
| Baguari Energia   |       | 179                   |       | 140 |   |
| ENTE              |       | 154                   |       | 59 |   |
| ETEP              |       | 98                    |       | 38 |   |
| Volta do Rio      |       | 88                    |       | — |   |
| EBTE              |       | 77                    |       | 7 |   |
| Morgado           |       | 69                    |       | — |   |
| Parajuru          |       | 65                    |       | — |   |
| ERTE              |       | 35                    |       | 13 |   |
| Transchile        |       | 28                    |       | 34 |   |
| Cachoeirão   |       | 23                    |       | 17 |   |
| ECTE              |       | 22                    |       | 10 |   |
| Pipoca            |       | 18                    |       | 4 |   |
| Centroeste        |       | 17                    |       | 7 |   |
| Alterosa          |       | 15                    |       | — |   |
| Transleste        |       | 12                    |       | 12 |   |
| Guanhães     |       | 10                    |       | 10 |   |
| Transudeste       |       | 9                     |       | 7 |   |
| Transirapé   |       | 6                     |       | 5 |   |
| Axxiom            |       | 3                     |       | 3 |   |
| Other investments |       | 24                    |       | 31 |   |
|              |       |                  |       |   |   |
|              |       | 3,329                 |       | 1,203 |   |

 

F-26

----

Table of Contents

 

Theinvestments are analyzed for impairment in accordance with FASB ASC Topic 323, InvestmentsEquity Method and Joint Ventures (APB Opinion No. 18, *The Equity Method of Accounting for Investments in Common Stock*).

 

(a) Acquisitionof interest in transmission companies (equity method — jointly control)

 

OnSeptember 24, 2008, Brookfield Brasil TBE Participações Ltda., one of theshareholders in transmission companies, exercised its option to sell to CEMIGand Alupar Investimento S.A.in the proportion of 95% and 5%, respectively, itsholdings, as follows, in the voting stock of the following companies: 24.99% ofthe voting stock of EATE; 24.99% of the voting stock of ETEP; 18.35% of thevoting stock of ENTE; 18.35% of the voting stock of ERTE; and 7.49% of thevoting stock of ECTE.

 

Completionof the transaction and final acquisition of the shares by CEMIG were approved in2009 by the Banco Nacional de Desenvolvimento (“BNDES”) and other financialentities and CEMIG acquired 100% of the shares from the Brookfield. The amountpaid is set out in detail below.

 
| ** **                                     | ** ** | **ETEP** | ** ** | **ENTE** | ** ** | **ERTE** | ** ** | **EATE** | ** ** | **ECTE** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Current assets                                 |       | 17       |       | 40       |       | 7        |       | 82       |       | 17       |       |
| Property, plant and  equipment and intangibles |       | 332      |       | 744      |       | 159      |       | 2,080    |       | 294      |       |
| Other assets                                   |       | 26       |       | —   |       | —   |       | 9        |       | —   |       |
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Total assets acquired                          |       | 375      |       | 784      |       | 166      |       | 2,171    |       | 311      |       |
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Current liabilities                            |       | (17      | )          | (65      | )          | (15      | )          | (104     | )          | (35      | )          |
| Long-term financing                            |       | (55      | )          | (199     | )          | (31      | )          | (306     | )          | (55      | )          |
| Other long-term  liabilities                   |       | (1       | )          | (2       | )          | —   |       | (3       | )          | —   |       |
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Total liabilities                              |       | (73      | )          | (266     | )          | (46      | )          | (413     | )          | (90      | )          |
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net assets                                     |       | 302      |       | 518      |       | 120      |       | 1,758    |       | 221      |       |
| Interest acquired                              |       | 19.86    | %          | 18.34    | %          | 18.34    | %          | 17.92    | %          | 5.87     | %          |
|                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net assets acquired                            |       | 60       |       | 95       |       | 22       |       | 315      |       | 13       |       |
| Price paid                                     |       | 60       |       | 95       |       | 22       |       | 315      |       | 13       |       |

 

(b) Consortiafor the Itaocara Hydroelectric Plant, and the Paracambi and Lajes Small HydroPlants

 

On July 3, 2008, theBoard of Directors authorized Cemig Geração e Transmissão the acquisition ofthe interest of 49% of the registered capital of the Itaocara Hydro Plant andthe Paracambi and Lajes Small Hydro Plants, and to constitute, the followingconsortia: the Itaocara Hydro Plant Consortium (Consórcio UHE Itaocara), inpartnership with Itaocara Energia Ltda.; the Paracambi Small Hydro PlantConsortium (Consórcio BCH Paracambi), in partnership with Lightger Ltda.; andthe Lajes Small Hydro Plant Consortium (Consórcio PCH Lajes), in partnershipwith Light Energia S.A. — all having as their object technical and economicfeasibility studies, preparation of projects and implementation, operation,maintenance and commercial operation of the respective projects. All privatecontracts mentioned above are pending authorizations or consents required fromthe competent regulatory bodies, including ANEEL.

 

(c) Acquisitionof interest in wind farms in 2009 (equity method — jointly control)

 

The Company acquired 49% ofthe following wind farms in the Brazilian state of Ceará: Parajuru Wind Farm,in the municipality of Beberibe; and Morgado Wind Farm and Volta do Rio WindFarm in the municipality of Acaraú.

 

All the electricity to begenerated by the wind farms will be sold to Eletrobrás, under the federal government’sAlternative Energy Sources Incentive Program (Proinfa).

 

F-27

----

Table of Contents

 

The details of the amountpaid by CEMIG Geração e Transmissão on August 14, 2009 are as follows:

 
| ** **                                     | ** ** | **Morgado** | ** ** | **Parajuru** | ** ** | **Volta do Rio** | ** ** |
|------------------------------------------------|------------|-------------|------------|--------------|------------|------------------|------------|
|                                           |       |        |       |         |       |             |       |
| Current assets                                 |       | 14          |       | 14           |       | 176              |       |
| Property, plant and  equipment and intangibles |       | 255         |       | 245          |       | 207              |       |
| Other assets                                   |       | 4           |       | —       |       | —           |       |
|                                           |       |        |       |         |       |             |       |
| Total assets acquired                          |       | 273         |       | 259          |       | 383              |       |
|                                           |       |        |       |         |       |             |       |
| Current liabilities                            |       | (4          | )          | (12          | )          | (26              | )          |
| Long-term financing                            |       | (126        | )          | (112         | )          | (175             | )          |
| Other long-term  liabilities                   |       | —      |       | —       |       | (2               | )          |
|                                           |       |        |       |         |       |             |       |
| Total liabilities                              |       | (130        | )          | (124         | )          | (203             | )          |
|                                           |       |        |       |         |       |             |       |
| Net assets                                     |       | 143         |       | 135          |       | 180              |       |
| Interest acquired                              |       | 49          | %          | 49           | %          | 49               | %          |
|                                           |       |        |       |         |       |             |       |
| Net assets acquired                            |       | 70          |       | 66           |       | 88               |       |
| Price paid                                     |       | 70          |       | 66           |       | 88               |       |

 

(d) Acquisitionof interest in TAESA, previously denominated as Terna Participações S.A. (“Terna”)of Terna Participações S.A. (equity method — jointly control)

 

OnApril 23, 2009 Cemig Geração e Transmissão signed a share purchaseagreement with Terna Rete Elettrica Nazionale S.p.A (“Terna S.p.A”), aninterest of 65.85% in Terna Participações S.A., a holding company operating inelectricity transmission, with a presence in 11 of Brazil’s States, forR$2,150. The holding company controls a total of six companies which, inaggregate, operate a total of more than 3,750 km of transmission lines. Theacquisition was pending authorizations or consents required from the competentregulatory bodies, including ANEEL.

 

On August 5, 2009 CEMIG’s Board of Directors approved, as analternative to acquisition of all of the shares of Terna held by Terna S.p.A.According to an optional term under the Share Purchase Agreement signed betweenCemig Geração e Transmissão and Terna S.p.A., there was a possibility ofreducing the final shareholding interest to be held by Cemig Geração eTransmissão in that acquisition. The reduction would set a minimum level of 50%less 1 (one) common share. Regarding the preferred shares, the reduction islimited to the percentage realized in the Public Offer to Purchase the sharesof the minority shareholders of that Company, through a partnership to beconstituted with Fundo de Investimentos em Participação Coliseu (“FIP Coliseu”).

 

The Board of Directors authorized the transfer of the Purchase and SaleAgreement of the acquisition of Terna to the transmission company TransmissoraAtlântico de Energia Elétrica (“Atlântico”). The Council established the CemigGeração e Transmissão retain its stake in TAESA represents 49% of the sharesissued by Atlântico, in association with the FIP Coliseu, holding the remaining51% of the shares.

 

OnOctober 19, 2009 Cemig Geração e Transmissão announced Completion of thePublic Distribution of Units of the First Issue by FIP Coliseu, structured byBanco Modal S.A., in the total amount of R$1,330. This amount was sufficientfor this fund to acquire 51% of the common shares of Terna.

 

OnOctober 30, 2009, Cemig Geração e Transmissão and FIP Coliseu providedfinancial resources to Atlântico.

 

OnNovember 3, 2009 the Share Purchase Agreement signed with Terna S.p.A. wassettled, with payment and transfer of the shares owned by Terna to Atlântico inwhich Cemig Geração e Transmissão holds 49% of the registered capital. Thetransaction involved the purchase of 173,527,113 common shares, representingapproximately 65.85% of the total capital of Terna.

 

F-28

----

Table ofContents

 

Thedetails of the amount paid by CEMIG Geração e Transmissão on November 3,2009 are as follows:

 
| ** **                        | ** ** | **TAESA** | ** ** |
|-----------------------------------|------------|-----------|------------|
|                              |       |      |       |
| Current assets                    |       | 265       |       |
| Property, plant and  equipment    |       | 5,554     |       |
| Other assets                      |       | 77        |       |
|                              |       |      |       |
| Total assets acquired             |       | 5,896     |       |
|                              |       |      |       |
| Current liabilities               |       | (792      | )          |
| Long-term financing               |       | (902      | )          |
| Other long-term  liabilities      |       | (597      | )          |
|                              |       |      |       |
| Total liabilities                 |       | (2,291    | )          |
|                              |       |      |       |
| Net consolidated assets           |       | 3,263     |       |
| Interest acquired                 |       | 32.27     | %          |
|                              |       |      |       |
| Net consolidated assets  acquired |       | 1,053     |       |
| Price paid                        |       | 1,053     |       |

 

**10. PROPERTY, PLANT AND EQUIPMENT, NET AND INTANGIBLES**

 

a)Property, Plant and Equipment

 

The following tabledescribes the consolidated property, plant and equipment:

 
| ** **                                           | ** ** | **Annual**                       | ** ** | ** **            | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                           | ** ** | **average rate of depreciation** | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **%**                            | ** ** | **2009**              | ** ** | **2008**   | ** ** |
| In service                                           |       |                             |       |                  |       |       |       |
| Generation-                                          |       |                             |       |                  |       |       |       |
| Hydroelectric *                                      |       | 2.49 (from 2.00% to 20.00%)      |       | 10,496                |       | 10,439     |       |
| Thermoelectric                                       |       | 3.98 (from 2.00% to 20.00%)      |       | 260                   |       | 260        |       |
|                                                 |       |                             |       |                  |       |       |       |
|                                                 |       |                             |       | 10,756                |       | 10,699     |       |
| Transmission                                         |       | 3.08 (from 2.00% to 20.00%)      |       | 1,846                 |       | 1,723      |       |
| Distribution                                         |       | 4.71 (from 2.00% to 20.00%)      |       | 12,657                |       | 11,983     |       |
| Administration                                       |       | 12.69 (from 3.00% to 20.00%)     |       | 509                   |       | 524        |       |
| Telecom                                              |       | 6.72 (from 2.00% to 20.00%)      |       | 380                   |       | 336        |       |
|                                                 |       |                             |       |                  |       |       |       |
|                                                 |       |                             |       | 26,148                |       | 25,265     |       |
|                                                 |       |                             |       |                  |       |       |       |
| Accumulated depreciation and amortization            |       |                             |       |                  |       |       |       |
| Generation — Hydroelectric and thermoelectric * |       |                             |       | (5,268                | )          | (5,047     | )          |
| Transmission                                         |       |                             |       | (1,103                | )          | (1,025     | )          |
| Distribution                                         |       |                             |       | (6,802                | )          | (6,448     | )          |
| Administration                                       |       |                             |       | (411                  | )          | (414       | )          |
| Telecom                                              |       |                             |       | (189                  | )          | (162       | )          |
|                                                 |       |                             |       |                  |       |       |       |
|                                                 |       |                             |       | (13,773               | )          | (13,096    | )          |
|                                                 |       |                             |       |                  |       |       |       |
| Total in service                                     |       |                             |       | 12,375                |       | 12,169     |       |
|                                                 |       |                             |       |                  |       |       |       |
| Construction in progress                             |       |                             |       |                  |       |       |       |
| Generation *                                         |       |                             |       | 140                   |       | 261        |       |
| Transmission                                         |       |                             |       | 106                   |       | 64         |       |
| Distribution                                         |       |                             |       | 1,154                 |       | 1,092      |       |
| Administration                                       |       |                             |       | 63                    |       | 119        |       |
| Telecom                                              |       |                             |       | 25                    |       | 28         |       |
|                                                 |       |                             |       |                  |       |       |       |
| Total in construction in progress                    |       |                             |       | 1,488                 |       | 1,564      |       |
|                                                 |       |                             |       |                  |       |       |       |
| Total of property, plant and equipment               |       |                             |       | 13,863                |       | 13,733     |       |

 

F-29

----

Table ofContents

 

Interest cost capitalized during the years ended December 31,2009 and 2008 was R$83 and R$155, respectively.

 

Theassets and installations used for generation, distribution and sales are tiedto these services, and may not be removed, disposed of, assigned or given inmortgage guarantee without prior authorization from the Regulatory Agency.ANEEL regulates the release of assets and concessions of the Public ElectricEnergy Service, granting prior authorization for the release of assets that areof no use to the concession, when intended for sale, establishing that theproceeds of the sale should be deposited in a tied bank account for investmentin the concession.

 

The Company’s evaluation ofimpairment in 2009 and 2008 did not result in any significant impairment ofproperty, plant and equipment and intangible assets.

 

Atthe end of concession, the property, plant and equipment connected to theservice will be reverted to the Concession Authority. The concessionaire isentitled to indemnification for its investments in expropriated assets thathave not been fully amortized or depreciated.

 

Inaccordance with normal practice in Brazil for electric utilities, from time totime, CEMIG constructs distribution systems for the benefit of consumers forwhich the consumer reimburses the cost. These reimbursements are accounted foras a reduction to the cost basis of the related assets as they are received.

 

Consortia*

 

CEMIGis a partner in certain consortia for electricity generation projects. Eachpartner has the right to take energy generated by the power plant in an amountproportional to the partner’s investment. These projects are governed byexecutor contracts which establish the rights and obligations of each party.

 

CEMIG’sparticipation in consortia, represented by amounts invested in the projects andwhich are included in the previous table, is as follows:

 
| ** **                                       | ** ** | **CEMIG’s**  | ** ** | ** **            | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|
| ** **                                       | ** ** | **Participation** | ** ** | **December 31,** | ** ** |
| ** **                                       | ** ** | **%**             | ** ** | **2009**              | ** ** | **2008**   | ** ** |
| ** **                                       | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service-                                      |       |              |       |                  |       |       |       |
| Queimado Hydroelectric Power Plant               |       | 82.50             |       | 234                   |       | 209        |       |
| Funil Hydroelectric Power Plant                  |       | 49.00             |       | 165                   |       | 163        |       |
| Igarapava Hydroelectric Power Plant              |       | 14.50             |       | 56                    |       | 56         |       |
| Porto Estrela Hydroelectric Power Plant          |       | 33.33             |       | 55                    |       | 55         |       |
| Aimorés Hydroelectric Power Plant           |       | 49.00             |       | 705                   |       | 692        |       |
| Amador Aguiar I and II Hydroelectric Power Plant |       | 21.05             |       | 54                    |       | 54         |       |
| (-) Accumulated depreciation                     |       |              |       | (156                  | )          | (126       | )          |
|                                             |       |              |       |                  |       |       |       |
|                                             |       |              |       | 1,113                 |       | 1,103      |       |
|                                             |       |              |       |                  |       |       |       |
| Construction in progress-                        |       |              |       |                  |       |       |       |
| Queimado Hydroelectric Power Plant               |       | 82.50             |       | —                |       | 25         |       |
| Aimorés Hydroelectric Power Plant           |       | 49.00             |       | —                |       | 11         |       |
| Funil Hydroelectric Power Plant                  |       | 49.00             |       | —                |       | 2          |       |
| Baguari Hydroelectric Power Plant                |       | 34.00             |       | —                |       | 5          |       |
|                                             |       |              |       |                  |       |       |       |
|                                             |       |              |       | —                |       | 43         |       |
|                                             |       |              |       |                  |       |       |       |
|                                             |       |              |       | 1,113                 |       | 1,146      |       |

 

F-30

----

Table ofContents

 

Theparticipation of the other partners in energy generation from consortia is asfollows:

 
| **Consortium - Power Plants**         | ** ** | **Consortium participants, other  than CEMIG**                | ** ** | **Participation (%)** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------|------------|
|                                  |       |                                                          |       |                  |       |
| Porto Estrela Hydroelectric           |       | Companhia de Tecidos Nortes de Minas Gerais —  COTEMINAS |       | 33.34                 |       |
|                                  |       | Vale S.A.                                                     |       | 33.33                 |       |
|                                  |       |                                                          |       |                  |       |
| Igarapava Hydroelectric               |       | Vale S.A.                                                     |       | 38.15                 |       |
|                                  |       | Companhia Mineira de Metais — CMN                        |       | 23.93                 |       |
|                                  |       | Companhia Siderúrgica Nacional - CSN                     |       | 17.92                 |       |
|                                  |       | Mineração Morro Velho - MMV                         |       | 5.50                  |       |
|                                  |       |                                                          |       |                  |       |
| Funil Hydroelectric                   |       | Vale S.A.                                                     |       | 51.00                 |       |
|                                  |       |                                                          |       |                  |       |
| Queimado Hydroelectric                |       | Companhia Energética de Brasília                    |       | 17.50                 |       |
|                                  |       |                                                          |       |                  |       |
| Aimorés Hydroelectric            |       | Vale S.A.                                                     |       | 51.00                 |       |
|                                  |       |                                                          |       |                  |       |
| Amador Aguiar I and  II Hydroelectric |       | Vale S.A.                                                     |       | 48.43                 |       |
|                                  |       | Comercial e Agrícola Paineiras Ltda.                     |       | 17.89                 |       |
|                                  |       | Companhia Mineira de Metais - CMN                             |       | 12.63                 |       |
|                                  |       |                                                          |       |                  |       |
| Baguari Hydroelectric                 |       | Furnas Centrais Elétrica S.A                             |       | 15.00                 |       |
|                                  |       | Baguari I Geração de Energia Elétrica S.A      |       | 51.00                 |       |

 

b)Intangibles

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                     |       |                  |       |   |   |
| Intangibles — gross carrying amount |       | 462                   |       | 426 |   |
| Accumulated amortization                 |       | (211                  | )          | (148 | ) |
|                                     |       |                  |       |   |   |
| Total of Intangibles                     |       | 251                   |       | 278 |   |

 

**11. ESCROW DEPOSITS**

 

The escrow deposits relateprincipally to tax and labor issues.

 

The escrow deposits are mainlycomprised of litigation, tax refer to ITCMD — Imposto de Transmissão CausaMortis e Doação (Inheritance and Donation Tax), Social Security and income taxobligations — related to indemnity for the “Anuênio” and profit andPASEP/COFINS — related to exclusion of Value-added tax (ICMS) from the taxbasis.

** **
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Litigation**                    |       | 203                   |       | 157 |   |
|                              |       |                  |       |   |   |
| **Tax obligations**               |       |                  |       |   |   |
| PASEP/COFINS                      |       | 297                   |       | 96 |   |
| ITCMD                             |       | 49                    |       | 50 |   |
| Income tax on interest on Capital |       | 14                    |       | — |   |
|                              |       |                  |       |   |   |
| **Others**                        |       | 100                   |       | 48 |   |
|                              |       |                  |       |   |   |
|                              |       | 663                   |       | 351 |   |

 

F-31

----

Table ofContents

 

**12. ACCOUNTS PAYABLE TO SUPPLIERS**

 
| ** **                                                                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Electricity suppliers-                                                                                 |       |                  |       |   |   |
| Eletrobrás — Energyfrom Itaipu                                                               |       | 137                   |       | 169 |   |
| Furnas Centrais  Elétricas S.A.                                                                   |       | 56                    |       | 68 |   |
| Spot market — CCEE/MAE                                                                            |       | 20                    |       | 76 |   |
| Payments to generators due to the extraordinary  rate tariff — RTE. Resolution No. 387 ANEEL |       | 30                    |       | — |   |
| Others                                                                                                 |       | 211                   |       | 178 |   |
|                                                                                                   |       |                  |       |   |   |
|                                                                                                   |       | 454                   |       | 491 |   |
|                                                                                                   |       |                  |       |   |   |
| Supplies and services                                                                                  |       | 216                   |       | 228 |   |
|                                                                                                   |       |                  |       |   |   |
|                                                                                                   |       | 670                   |       | 719 |   |
|                                                                                                   |       |                  |       |   |   |
| Current liabilities                                                                                    |       | 668                   |       | 719 |   |
| Other non-current liabilities                                                                          |       | 2                     |       | — |   |

 

Dueto the agreement established between CEMIG, ANEEL and market agents, theamounts due to CCEE/MAE were due on September 2009 and were adjusted usingthe SELIC rate plus annual interest of 1%. The conclusion of some courtproceedings in progress, brought by market agents, in relation to theinterpretation of the rules in force at the time of the realization of thetransactions in the ambit of the CCEE/MAE, may result in changes in the amountsrecorded. (See Note 4).

 

OnDecember 15, 2009, ANEEL issued the Resolution No. 387, whichestablished that the balance of the Free Energy and Loss of Revenue, after theclose of the collection of the Extraordinary Rate Tariff - RTE to supplytariffs of distribution companies should be recalculated using a newmethodology.

 

The final transfer of free energy corresponds to the sum of the monthlydifferences, positive or negative, between the financial transfers of FreeEnergy made according to criteria defined and effectively transfers alreadymade, plus the financial remuneration for the SELIC rate from the date ofoccurrence of difference to the closing date of the recovery of RTE in supplytariffs. The amount to be passed on to the Generators is updated based on theSELIC rate plus annual interest of 1%.

 

**13.****TAXESPAYABLE**

 

The following table describes taxes payable:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Current -                    |       |                  |       |   |   |
| Income tax                   |       | 32                    |       | 44 |   |
| Social contribution tax      |       | 11                    |       | 17 |   |
| VAT (ICMS)                   |       | 288                   |       | 277 |   |
| Tax on revenue — COFINS |       | 60                    |       | 80 |   |
| Tax on revenue — PASEP  |       | 18                    |       | 17 |   |
| Others                       |       | 42                    |       | 36 |   |
|                         |       |                  |       |   |   |
|                         |       | 451                   |       | 471 |   |
|                         |       |                  |       |   |   |
| Long-term -                  |       |                  |       |   |   |
| Income tax                   |       | —                |       | 1 |   |
| Tax on revenue — COFINS |       | 277                   |       | 75 |   |
| Tax on revenue — PASEP  |       | 60                    |       | 30 |   |
| Others                       |       | 1                     |       | — |   |
|                         |       |                  |       |   |   |
|                         |       | 338                   |       | 106 |   |
|                         |       |                  |       |   |   |
|                         |       | 789                   |       | 577 |   |

 

Thelong-term PASEP and COFINS obligations refer to the legal proceedingschallenging the constitutionality of inclusion of the ICMS tax in the basis ofcalculation of the taxable amount for these taxes. The action also applies foroffsetting of the amounts paid in the last 10 years. The Company has obtainedinterim relief from the court allowing it not to make the payment andauthorizing payment through court deposits starting in 2008.

 

F-32

----

Table ofContents

 

**14.FINANCING**

 

(a)              The following tables describe the Company ́sfinancings:

 
| ** **                                                         | ** ** | ** **                  | ** ** | ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | ** **                  | ** ** | ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **LENDERS**                                                        | ** ** | **Payments of Principal**   | ** ** | **Annual Interest********Rates (%)** | ** ** | **Currency**          | ** ** | **Current** | ** ** | **Long********Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                                         | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IN LOCAL CURRENCY**                                              | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Banco  Credit Suisse First Boston S.A. II                          |       | Single payment in 2010      |       | 106.00% of CDI                       |       | R$                    |       | 75 |   | — |   | 75 |   | 75 |   |
| Banco do Brasil S.A. III and VII                                   |       | Single payment in 2012      |       | 111.00% of CDI                       |       | R$                    |       | 41 |   | 79 |   | 120 |   | 121 |   |
| Banco do Brasil S.A.                                               |       | Single payment in 2012      |       | 110.00% of CDI                       |       | R$                    |       | 262 |   | 503 |   | 765 |   | — |   |
| Banco do Brasil S.A. IV and VIII                                   |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 31 |   | 82 |   | 113 |   | 114 |   |
| Banco do Brasil S.A. V and IX                                      |       | Single payment in 2013      |       | 107.60% of CDI                       |       | R$                    |       | 8 |   | 126 |   | 134 |   | 138 |   |
| Banco do Brasil S.A.                                               |       | Annually through 2014       |       | 104.10% of CDI                       |       | R$                    |       | 19 |   | 1,200 |   | 1,219 |   | 1,230 |   |
| Banco Itaú — BBA IV and VII                              |       | Annually through 2013       |       | CD + 1.70                            |       | R$                    |       | 86 |   | 226 |   | 312 |   | 316 |   |
| Banco Itaú — BBA IV and VII                              |       | Annually through 2014       |       | CD + 1.70                            |       | R$                    |       | — |   | 3 |   | 3 |   | 4 |   |
| Banco Votorantim S.A. I and III                                    |       | Single payment in 2010      |       | 113.50% of CDI                       |       | R$                    |       | 55 |   | — |   | 55 |   | 55 |   |
| Banco Votorantim S.A. II, III, IV                        |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 26 |   | 76 |   | 102 |   | 103 |   |
| Banco Nacional de Desenvolvimento Econômico e  Social - BNDES |       | Monthly through 2026        |       | TJLP + 2.34                          |       | R$                    |       | 5 |   | 119 |   | 124 |   | — |   |
| Bradesco S.A. II, III                                         |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 1 |   | 1 |   | 2 |   | 2 |   |
| Bradesco S.A. II, III                                         |       | Annually through 2014       |       | CDI + 1.70                           |       | R$                    |       | 109 |   | 283 |   | 392 |   | 399 |   |
| Bradesco S.A. (3)                                                  |       | Single payment in 2010      |       | 113.00% of CDI                       |       | R$                    |       | 2,742 |   | — |   | 2,742 |   | — |   |
| Debentures II                                                      |       | Single payment in 2009      |       | CDI + 1.20                           |       | R$                    |       | — |   | — |   | — |   | 357 |   |
| Debentures II                                                      |       | Single payment in 2011      |       | 104% of CDI                          |       | R$                    |       | 3 |   | 239 |   | 242 |   | 244 |   |
| Debentures  III—Minas Gerais State Government                 |       | Through various             |       | IGP-M                                |       | R$                    |       | — |   | 37 |   | 37 |   | 33 |   |
| Debentures  IV                                                     |       | Single payment in 2014      |       | IGP-M + 10.50                        |       | R$                    |       | 18 |   | 301 |   | 319 |   | 325 |   |
| Debentures  V                                                      |       | Single payment in 2017      |       | IPCA + 7.96                          |       | R$                    |       | 2 |   | 444 |   | 446 |   | 428 |   |
| ELETROBRÁS I and III                                          |       | Monthly through 2013        |       | FINEL + 7.50 and  8.50               |       | R$                    |       | 12 |   | 36 |   | 48 |   | 61 |   |
| ELETROBRÁS IV                                                 |       | Quarterly thorough 2023     |       | UFIR + 6.00 to  8.00                 |       | R$                    |       | 46 |   | 307 |   | 353 |   | 370 |   |
| Large  consumers — C.V.R.D.                                   |       | Semi-annually through  2011 |       | Various                              |       | R$                    |       | 3 |   | 3 |   | 6 |   | 5 |   |
| Banco Santander Brasil S.A. I and  II                              |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 21 |   | 60 |   | 81 |   | 81 |   |
| UNIBANCO V                                                         |       | Single payment in 2009      |       | CDI + 2.98                           |       | R$                    |       | — |   | — |   | — |   | 107 |   |
| UNIBANCO VI and X                                                  |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 87 |   | 232 |   | 319 |   | 322 |   |
| UNIBANCO I                                                         |       | Annually through 2013       |       | CDI + 1.70                           |       | R$                    |       | 23 |   | 55 |   | 78 |   | 81 |   |
| Banco Itaú and Bradesco (2)                                   |       | Semi-annually  through2015  |       | CDI + 1.70                           |       | R$                    |       | 147 |   | 804 |   | 951 |   | 990 |   |
| Banco do Nordeste do Brasil                                        |       | Single payment in 2010      |       | TR + 7.30                            |       | R$                    |       | 38 |   | — |   | 38 |   | 105 |   |
| Others                                                             |       | Through various             |       | Various                              |       | R$                    |       | — |   | 11 |   | 11 |   | — |   |
|                                                               |       |                        |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |
| **Total local currency**                                           | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **            | ** ** | **3,860** | ** ** | **5,227** | ** ** | **9,087** | ** ** | **6,066** | ** ** |

 

F-33

----

Tableof Contents

 
| ** **                              | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **   | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** | **Annual**               | ** ** | ** **   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **LENDERS**                             | ** ** | **Payments  of Principal**  | ** ** | **Interest  Rates  (%)** | ** ** | **Currency** | ** ** | **Current**           | ** ** | **Long********Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **   | ** ** | **R$ million**   | ** ** |
| **IN FOREIGN CURRENCY**                 | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ABN  AMRO Bank — N. II             |       | Annually through 2013       |       | 6.00                     |       | US$          |       | 22                    |       | 65 |   | 87 |   | 117 | ** ** |
| ABN  AMRO Real S.A. III, IV and V  |       | Semi-annually through  2009 |       | 6.35                     |       | US$          |       | —                |       | — |   | — |   | 17 | ** ** |
| Banco do Brasil S.A. — Various (1) |       | Semi-annually through  2024 |       | Various                  |       | US$          |       | 9                     |       | 58 |   | 67 |   | 94 | ** ** |
| Banco do Brasil S.A. II                 |       | Single payment in 2009      |       | 3.90                     |       | JPY          |       | —                |       | — |   | — |   | 100 | ** ** |
| Banco  Paribas II                       |       | Semi-annually through  2012 |       | 5.89                     |       | EURO         |       | 3                     |       | 4 |   | 7 |   | 13 | ** ** |
| Banco Paribas I and III                 |       | Semi-annually through  2010 |       | Libor + 1.87             |       | US$          |       | 10                    |       | — |   | 10 |   | 42 | ** ** |
| KFW                                     |       | Semi-annually through  2016 |       | 4.50                     |       | EURO         |       | 2                     |       | 10 |   | 12 |   | 17 | ** ** |
| UNIBANCO I, III e VIII             |       | Through various             |       | 6.50                     |       | US$          |       | —                |       | — |   | — |   | 11 | ** ** |
| UNIBANCO  III and V                     |       | Single payment in 2009      |       | 5.50                     |       | US$          |       | —                |       | — |   | — |   | 5 | ** ** |
| UNIBANCO  IV and IX                     |       | Single payment in 2009      |       | 5.00                     |       | US$          |       | —                |       | — |   | — |   | 20 | ** ** |
| Toshiba do Brasil S.A.                  |       | Quarterly through 2011      |       | Libor + 6.00             |       | US$          |       | 7                     |       | — |   | 7 |   | 9 | ** ** |
|                                    |       |                        |       |                     |       |         |       |                  |       |   |   |   |   |   | ** ** |
| **Total foreign currency financing**    |       |                        |       |                     |       |         | ** ** | **53**                | ** ** | **137** | ** ** | **190** | ** ** | **445** | ** ** |
| ** **                              |       |                        |       |                     |       |         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **TOTAL**                               |       |                        |       |                     |       |         | ** ** | **3,913**             | ** ** | **5,364** | ** ** | **9,277** | ** ** | **6,511** | ** ** |

----

(1)  Theseinterest rates vary from 2.00 to 8.00% per year;

(2)  Refers tosenior quotas of the FIDC;

(3)  Promissorynotes from CEMIG Geração e Transmissão.

 

(b)             Composition of foreign currency financings anddomestic currency financings by indices:

 
| ** **                                                                                           | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012**  | ** ** | **2013**  | ** ** | **2014** | ** ** | **2015** | ** ** | **2016** | ** ** | **2017 and  thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|--------------------------|------------|-----------|------------|
| Currency -                                                                                           |       |      |       |      |       |      |       |      |       |     |       |     |       |     |       |                     |       |      |       |
| United  States Dollars                                                                               |       | 48        |       | 30        |       | 28        |       | 26        |       | 2        |       | —   |       | —   |       | 37                       |       | 171       |       |
| Euro                                                                                                 |       | 5         |       | 4         |       | 3         |       | 2         |       | 2        |       | 2        |       | 1        |       | —                   |       | 19        |       |
|                                                                                                 |       |      |       |      |       |      |       |      |       |     |       |     |       |     |       |                     |       |      |       |
|                                                                                                 | ** ** | **53**    | ** ** | **34**    | ** ** | **31**    | ** ** | **28**    | ** ** | **4**    | ** ** | **2**    | ** ** | **1**    | ** ** | **37**                   | ** ** | **190**   | ** ** |
| Index -                                                                                              |       |      |       |      |       |      |       |      |       |     |       |     |       |     |       |                     |       |      |       |
| *Certificado de Depósito  Interbancário — CDI* (Interbank deposit rate)               |       | 3,736     |       | 1,009     |       | 1,169     |       | 1,015     |       | 549      |       | 227      |       | —   |       | —                   |       | 7,705     |       |
| *Índice Geral de Preços de  Mercado* — “IGP-M” (General Market Price Index) |       | 18        |       | —    |       | —    |       | —    |       | 301      |       | —   |       | —   |       | 37                       |       | 356       |       |
| *Unidade Fiscal de  Referência* — “UFIR” (Tax Reference Unit)                    |       | 46        |       | 53        |       | 50        |       | 44        |       | 43       |       | 38       |       | 31       |       | 48                       |       | 353       |       |
| *Índice  Interno da Eletrobrás* — “FINEL” (Eletrobrás Internal Index)  |       | 12        |       | 12        |       | 12        |       | 12        |       | —   |       | —   |       | —   |       | —                   |       | 48        |       |
| *Índice de  Preço ao Consumidor Amplo* — “IPCA” (Consumer Price  Index)     |       | 2         |       | 1         |       | 1         |       | —    |       | —   |       | 148      |       | 148      |       | 148                      |       | 448       |       |
| *Taxa  Referencial* — “TR” (Referencial Tax Index)                                    |       | 38        |       | —    |       | —    |       | —    |       | —   |       | —   |       | —   |       | —                   |       | 38        |       |
| *Unidade de  Referência de Taxa de Juros — “*URTJ”                               |       | 5         |       | 10        |       | 10        |       | 10        |       | 10       |       | 8        |       | 8        |       | 73                       |       | 134       |       |
| Others                                                                                               |       | 3         |       | —    |       | —    |       | —    |       | 1        |       | 1        |       | —   |       | —                   |       | 5         |       |
|                                                                                                 |       |      |       |      |       |      |       |      |       |     |       |     |       |     |       |                     |       |      |       |
|                                                                                                 | ** ** | **3,860** | ** ** | **1,085** | ** ** | **1,242** | ** ** | **1,081** | ** ** | **904**  | ** ** | **422**  | ** ** | **187**  | ** ** | **306**                  | ** ** | **9,087** | ** ** |
|                                                                                                 |       |      |       |      |       |      |       |      |       |     |       |     |       |     |       |                     |       |      |       |
|                                                                                                 | ** ** | **3,913** | ** ** | **1,119** | ** ** | **1,273** | ** ** | **1,109** | ** ** | **908**  | ** ** | **424**  | ** ** | **188**  | ** ** | **343**                  | ** ** | **9,277** | ** ** |

 

F-34

----

Table of Contents

 

(c) The following table sets forth thevariations for the periods indicated in the foreign currency / Brazilian *real* exchange rates for the principalforeign currencies used to restate financing, expressed as a percentage:

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Currency-             |       |                             |       |   |   |   |   |
| United States Dollars |       | (25.49                           | )          | 31.94 |   | (17.15 | ) |
| Japanese Yen          |       | (27.10                           | )          | 62.89 |   | (11.78 | ) |
| Euro                  |       | (22.57                           | )          | 24.13 |   | (7.50 | ) |

 

(d) Thefollowing table sets forth the variations for the periods indicated of theprincipal indices applied to domestic currency financing, expressed as apercentage:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Index-     |       |                             |       |   |   |   |   |
| CDI        |       | 9.93                             |       | 12.32 |   | 11.82 |   |
| IGP-M      |       | (1.72                            | )          | 9.81 |   | 7.75 |   |
| SELIC      |       | 9.84                             |       | 12.48 |   | 11.88 |   |
| FINEL      |       | (0.35                            | )          | 1.90 |   | 1.51 |   |

 

(e) The movement on financing is asfollows:

 
| ** **                              | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                                    |       |                             |       |   |   |
| Balance at beginning of year            |       | 6,511                            |       | 6,814 |   |
| Loans and financings                    |       | 3,614                            |       | 176 |   |
| Monetary and Foreign currency variation |       | 19                               |       | 322 |   |
| Financial charges provisioned           |       | 581                              |       | 650 |   |
| Financial charges paid                  |       | (577                             | )          | (644 | ) |
| Amortization of financings              |       | (884                             | )          | (807 | ) |
| Others                                  |       | 13                               |       | — |   |
| ** **                              |       |                             |       |   |   |
| **Balance at end of year**              | ** ** | **9,277**                        | ** ** | **6,511** | ** ** |

 

(f) Theconsolidated totals of funds raised in 2009 are as follows:

 
| **Loans / financing sources**                    | ** ** | **Principal maturity** | ** ** | **Annual cost** | ** ** | **Amount raised** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------|------------|-------------------|------------|
| **IN LOCAL CURRENCY**                            | ** ** | ** **             | ** ** | ** **      | ** ** | ** **        | ** ** |
|                                             |       |                   |       |            |       |              |       |
| ***Cemig Geração e Transmissão*** | * *   | * *               | * *   | * *        | * *   | * *          | * *   |
| Banco Bradesco S.A.                              |       | 2010                   |       | 113% of CDI     |       | 2,700             |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 153               |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 428               |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 10                |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 7                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 8                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 110% of CDI     |       | 57                |       |
| BNDES                                            |       | 2026                   |       | TJLP + 2.34     | %          | 107               |       |
| BNDES                                            |       | 2026                   |       | TJLP + 2.34     | %          | 10                |       |
| BNDES                                            |       | 2026                   |       | TJLP + 2.34     | %          | 5                 |       |
| Construtora Quebec  Ltda                         |       | 2012                   |       | IPCA            |       | 1                 |       |
| Energ Power Ltda                                 |       | 2012                   |       | IPCA            |       | 1                 |       |
| Financiadora de  Estudos e Projetos — FINEP |       | 2015                   |       | URTJ + 5.00     |       | 4                 |       |
| Financiadora de  Estudos e Projetos — FINEP |       | 2015                   |       | URTJ + 5.00     |       | 4                 |       |
|                                             |       |                   |       |            |       |              |       |
| ***Cemig Distribuição***               | * *   | * *               | * *   | * *        | * *   | * *          | * *   |
| ELETROBRÁS                                  |       | 2013                   |       | 6.50            | %          | 2                 |       |
| ELETROBRÁS                                  |       | 2015                   |       | 7.00            | %          | 26                |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 20                |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 7                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 4                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 6                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 9                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 35                |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 3                 |       |
| Banco do Brasil S.A.                             |       | 2012                   |       | 111% of CDI     |       | 7                 |       |
| **Total raised**                                 | ** ** | ** **             | ** ** | ** **      | ** ** | **3,614**         | ** ** |

 

F-35

----

Tableof Contents

 

(g) Restrictive Covenants

 

Certainof CEMIG’s loans, financing agreements and debentures contain certain financialcovenants which are calculated using financial statements prepared inaccordance with Brazilian GAAP.

 

Themain covenants in existence on December 31, 2009 are as follows:

 
| **Subject  of covenant**              | ** ** | **Index required**          | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
|                                  |       |                        |       |
| Debt / Ebitda                         |       | Less  than or equal to 2,5  |       |
| Debt / Ebitda                         |       | Less  than or equal to 3,36 |       |
| Net debt/Ebitda                       |       | Less  than or equal to 3,25 |       |
| Current debt/Ebitda                   |       | Less  than or equal to 90%  |       |
| Debt/Shareholders’ equity + debt |       | Less  than or equal to 53%  |       |
| Ebitda/Interest on debt               |       | More  than or equal to 2,8  |       |
| Ebitda / Interest                     |       | More  than or equal to 3,0  |       |
| Ebitda/(Financial income (expenses)   |       | More  than or equal to 2,0  |       |
| Capital expenditure / Ebitda          |       | Less  than or equal to 60%  |       |

 

Netdebt = Total debt less (cash balance plus tradable securities)

Ebitda=earnings before interest, taxes on profit, depreciation and amortization, Insome contracts specific criteria are established for calculation of Ebitda,with some variations from this formula.

 

Certainrestrictive covenants mentioned above were not complied with, as follows:

 
| **Description  of the restrictive covenant**   | ** ** | **Index required**         | ** ** | **Position on December  31, 2009** | ** ** | **Outstanding debt** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|----------------------|------------|
| **CEMIG Geração e Transmissão** |       |                       |       |                               |       |                 |       |
| Debt / (Shareholders’ equity + Debt)      |       | Less  than or equal to 53% |       | 61.22                              | %          | 179                  |       |
| **CEMIG Distribuição**               |       |                       |       |                               |       |                 |       |
| Capital expenditure / Ebitda                   |       | Less  than or equal to 60% |       | 92.42                              | %          | 142                  |       |
| Debt/Ebitda                                    |       | Less  than or equal to 2.5 |       | 2.78                               |       | 87                   |       |

 

TheCompany obtained waivers from the creditors consenting that it would notexercise its right to demand immediate or early payment of the amount owed upto January 1, 2011. The financings are classified as Current liabilitiesand Non-current liabilities, in accordance with the original terms of thecontract, in view of those consents obtained.

 

**15. REGULATORY CHARGES PAYABLE**

 

The following table describes the Company’s regulatorycharges payable:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Global reserve for reversion quota    |       | 35                    |       | 32 |   |
| Fuel usage quota                      |       | 12                    |       | 42 |   |
| Emergency capacity charge             |       | 35                    |       | 36 |   |
| Energy development account            |       | 34                    |       | 30 |   |
| Energy efficiency and R&D program |       | 333                   |       | 327 |   |
| Parcel A                              |       | 110                   |       | — |   |
| Other                                 |       | 20                    |       | 13 |   |
|                                  |       |                  |       |   |   |
|                                  |       | 579                   |       | 480 |   |
|                                  |       |                  |       |   |   |
| Current liabilities                   |       | 317                   |       | 460 |   |
| Non-current liabilities               |       | 262                   |       | 20 |   |

 

F-36

----

Table ofContents

 

(a) Global reserve forreversion quota:

 

The global reserve for reversion quota was establishedas a fund managed by ELETROBRÁS (*Centrais Elétricas Brasileiras S.A*., the FederalGovernment-owned holding company for investments in the Brazilian power sector) for the purpose of reimbursement of electricitycompanies’ investments when their concessions expire and assets subject to theconcession revert to the Federal Government. It is funded through assessmentson power companies and is based on 2.5% of assets in service, limited to 3% oftotal annual operating revenues, net of value-added tax on sales to finalcustomers.

 

(b) Fuel usage quota:

 

The fuel usage quota represents contributions made bythe electricity company concessionaires to subsidize the cost of fuel used inthe thermoelectric energy generating process in the Brazilian power system.

 

(c) Emergency capacitycharge:

 

The emergency capacity charge represents a chargeestablished in 2002, which is prorated among final consumers of electricenergy, and relates to the acquisition of energy and contracted generationcapacity by the *Comercializadora Brasileirade Energia Elétrica* (The Brazilian Emergency Energy Trader or “CBEE”).

 

(d) Energy development account:

 

The energy development account was created by Law No. 10.438/02to foster energy development in the states and to promote competition regardingenergy produced through wind farms, small hydroelectric power plants, biomass,natural gas and coal. The amounts to be paid by CEMIG were defined by ANEELResolution No. 42 dated January 31, 2003.

 

(e) Energy efficiencyand R&D program

 

In compliance with the regulation of the electric powersector, the electric power distributors and generators are required to spend 1%of their net revenues in energy efficiency and research and developmentprograms. The percentage is included annually in CEMIG’s revenues through arate adjustment stipulated by ANEEL, which should be dedicated to this program.

 

**16****. EMPLOYEEPOST-RETIREMENT BENEFITS**

 

The Company sponsors a pension plan, administered by *Fundação Forluminas de Seguridade Social* -FORLUZ (Forluminas Social Security Foundation, or “FORLUZ”) coveringsubstantially all of its employees. The Company has applied ASC Topic 715 as from January 1,1995. However, amortization of the net transition obligation existing at January 1,1995 has been computed retroactively as if it had been established on January 1,1989, which is the date that ASC Topic 715 first became applicable for non-U.S. pension funds.

 

Until October 1997, the Company sponsored only adefined benefit pension plan. From September 29, 1997 to May 1, 1998, participants were permitted to elect tomigrate to a new defined contribution plan. Those participants who elected tojoin the new plan had two options. The first was to maintain the benefit earnedup to the date of migration in the defined benefit plan, with no furtherincreases for salary increases or future services, and future contributionswould be made to the new plan to the individual account. The second option forthose participants who migrated to the defined contribution plan was totransfer the accumulated benefit as of that date to their individual account inthe defined contribution plan. In both alternatives, the participants becamefully vested in the benefits accumulated as of the migration date.

 

Under the defined contribution plan the Company willmatch the employees’ contributions from 3% to 12% of each employee’s salary,depending on certain factors. The total assets in the defined contribution plan(which is also administered by FORLUZ) as of December 31, 2009 and 2008was R$2,767 and R$2,386, respectively, and the contribution expense for theyears ended December 31, 2009, 2008 and 2007 was R$43, R$49 and R$34,respectively.

 

F-37

----

Table ofContents

 

CEMIG has also established post-retirement health careand dental plans and pays life insurance premiums for retirees. The accountingfor these benefits is in accordance with SFAS No 106 “Employers’ Accounting forPost-retirement Benefits other than Pensions” (included in ASC Topic 715).

 

CEMIG’s measurement date for its employeepost-retirement benefits is December 31.

 

The Company adopted SFAS No. 158 (included in ASC Topic 715), effective on December 31, 2006, whichrequires recognition of an asset or liability in the balance sheet reflectingthe funded status of pension and other post-retirement benefit plans withcurrent-year changes in the funded status recognized in shareholders’equity.  The Company recognized acumulative adjustment, net of tax, to adopt the recognition provisions of SFAS No. 158as of December 31, 2006.

 

Amortizationof deficit in actuarial reserves

 

Part of the post-retirement benefit liabilities, in the amount ofR$904, as of December 31, 2009 (R$942 as of December 31, 2008), wasrecognized as obligations payable by the Company. These obligations are beingamortized through monthly installments, through June 2024, calculatedunder the fixed-installment system (“Price Table”). Part of these amountsis restated annually according to the salary adjustment index for the Company’semployees (not including productivity) included in the defined benefit plan,and part is adjusted according to the IPCA — IPEAD (consumer price indexcalculated by the Minas Gerais Accounting Management and Economic ResearchInstitute 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. Therefore, the surplus presented by FORLUZin 2006, in the amount of R$207, was used to reduce the Company’s debtmentioned above and therefore the annual payments of contributions from CEMIGto Forluz. Such compensation does not represent a reduction on CEMIG’s benefitobligation, which is measured according to actuarial criteria.

 

The reconciliation of funded status of the planis as follows:

 
| ** **                   | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**                                | ** ** |
| ** **                   | ** ** | **2009**                         | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Projected Benefit obligation |       | 5,850                            |       | 5,572                                                           |       | 951 |   | 922 |   |
| Fair Value of plan assets    |       | (5,411                           | )          | (4,654                                                          | )          | — |   | — |   |
|                         |       |                             |       |                                                            |       |   |   |   |   |
| Funded status                |       | 439                              |       | 918                                                             |       | 951 |   | 922 |   |

 

The change in benefit obligations for the years ended December 31,2009 and 2008 is as follows:

 
| ** **                                            | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**                                | ** ** |
| ** **                                            | ** ** | **2009**                         | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Projected Benefit obligation — beginning of year |       | 5,572                            |       | 5,789                                                           |       | 922 |   | 900 |   |
| Service cost                                          |       | 5                                |       | 6                                                               |       | 11 |   | 45 |   |
| Interest cost                                         |       | 549                              |       | 543                                                             |       | 93 |   | 84 |   |
| Actuarial (gain) loss                                 |       | 122                              |       | (387                                                            | )          | (30 | ) | (65 | ) |
| Benefits paid to participants                         |       | (398                             | )          | (379                                                            | )          | (45 | ) | (42 | ) |
|                                                  |       |                             |       |                                                            |       |   |   |   |   |
| Projected Benefit obligation — end of year       |       | 5,850                            |       | 5,572                                                           |       | 951 |   | 922 |   |

 

TheAccumulated Benefit Obligation as of December 31, 2009 and 2008 amountedto R$5,681 and R$5,445, respectively, and the contributions expected to be paidto the defined benefit pension plan and other plans for the next year are R$161and R$42, respectively.

 

F-38

----

Table ofContents

 

The change in plan assets for the years ended December 31, 2009and 2008 is as follows:

 
| ** **                                                 | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**                                | ** ** |
| ** **                                                 | ** ** | **2009**                         | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Fair market value of plan assets — beginning of  year |       | 4,654                            |       | 4,385                                                           |       | — |   | 33 |   |
| Employer contributions                                     |       | 155                              |       | 165                                                             |       | 45 |   | 42 |   |
| Actual return on plan assets                               |       | 1,000                            |       | 483                                                             |       | — |   | (33 | ) |
| Benefits paid to participants                              |       | (398                             | )          | (379                                                            | )          | (45 | ) | (42 | ) |
|                                                       |       |                             |       |                                                            |       |   |   |   |   |
| Fair market value of plan assets — end of year        |       | 5,411                            |       | 4,654                                                           |       | — |   | — |   |

 

The changes in benefit obligations (net of taxes) recognized inAccumulated other comprehensive income for the years ended December 31,2009, 2008 and 2007, net of taxes, are as follows:

 
| ** **                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated other  comprehensive income at beginning of year |       | 711      |       | 1,010    |       | 610      |       |
| Increase (decrease) in  liability                            |       | (253     | )          | (299     | )          | 400      |       |
|                                                         |       |     |       |     |       |     |       |
| Accumulated other  comprehensive income at the end of year   |       | 458      |       | 711      |       | 1,010    |       |

 

The components of accumulated other comprehensiveloss/income (ASC Topic 715)ended December 31, 2009 are  asfollows:

 
| ** **                                                                                                                | ** ** | **Defined benefit********pension plan** | ** ** | **Post-retirement********health care,********insurance********and dental** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Transition obligation  (asset) not yet recognized in net periodic pension cost (“NPPC”) at beginning  of period |       | —                                  |       | 7                                                                          |       |
| Transition obligation  (asset) recognized in NPPC during period                                                           |       | —                                  |       | (5                                                                         | )          |
| Prior service cost  (credit) not yet recognized in NPPC at beginning of period                                            |       | 90                                      |       | 52                                                                         |       |
| Prior Service Cost  (credit) recognized in NPPC during period                                                             |       | (10                                     | )          | (6                                                                         | )          |
| Gain/loss not yet  recognized in NPPC at beginning of period                                                              |       | 254                                     |       | 146                                                                        |       |
| Gain/loss recognized in  NPPC during period                                                                               |       | —                                  |       | (12                                                                        | )          |
| Total net actuarial  (gain)/ loss arising during period                                                                   |       | (320                                    | )          | (30                                                                        | )          |
|                                                                                                                      |       |                                    |       |                                                                       |       |
| Total accumulated in other  comprehensive loss as of 12/31/2009                                                           |       | 14                                      |       | 152                                                                        |       |

 

The components of net periodic benefit costs for years ended December 31,2009, 2008 and 2007 are as follows:

 
| ** **                            | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                            | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,**                                | ** ** |
| ** **                            | ** ** | **2009**                         | ** ** | **2008**                                                        | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                          |       | 5                                |       | 6                                                               |       | 5 |   | 11 |   | 45 |   | 36 |   |
| Interest cost                         |       | 549                              |       | 543                                                             |       | 545 |   | 93 |   | 84 |   | 86 |   |
| Expected return on plan assets        |       | (558                             | )          | (481                                                            | )          | (566 | ) | — |   | (4 | ) | (4 | ) |
| Amortization of transition obligation |       | —                           |       | —                                                          |       | — |   | 5 |   | 5 |   | 5 |   |
| Amortization of loss (gain)           |       | —                           |       | 38                                                              |       | — |   | 12 |   | 12 |   | 9 |   |
| Expected Employee contribution        |       | —                           |       | —                                                          |       | — |   |   |   | (34 | ) | (26 | ) |
| Amortization of prior service cost    |       | 10                               |       | 10                                                              |       | 10 |   | 6 |   | 6 |   | 5 |   |
|                                  |       |                             |       |                                                            |       |   |   |   |   |   |   |   |   |
| Net periodic benefit cost             |       | 6                                |       | 116                                                             |       | (6 | ) | 127 |   | 114 |   | 111 |   |

 

F-39

----

Tableof Contents

 

The components of the projected net periodic post-retirement benefitcosts for 2010 are as follows:

 
| ** **                            | ** ** | **Defined benefit pension  plan** | ** ** | **Post-retirement health care,  insurance and dental** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|
| Service cost                          |       | 5                                 |       | 11                                                     |       |
| Interest cost                         |       | 605                               |       | 100                                                    |       |
| Expected return on plan assets        |       | (597                              | )          | —                                                 |       |
| Amortization of prior service cost    |       | 10                                |       | 6                                                      |       |
| Amortization of transition obligation |       | —                            |       | 1                                                      |       |
| Amortization of loss                  |       | —                            |       | 7                                                      |       |
|                                  |       |                              |       |                                                   |       |
|                                  |       | 23                                |       | 125                                                    |       |

 

The weighted-average and amount asset allocation byasset category is as follows:

 
| ** **             | ** ** | **Defined benefit pension  plan, Post-retirement health care and Dental** | ** ** |
|------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Asset allocation at  December 31,**                                | ** ** | **Target asset allocation  as per  FORLUZ Investment  Committee percentage or  range of percentage’s** | ** ** |
| **Type of investment** | ** ** | **2009**                                                                  | ** ** | **R$** | ** ** | **2008** | ** ** | **R$** | ** ** | ** ** | ** ** |
|                   |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Debt Securities        |       | 83.63                                                                     |       | 6,839 |   | 85.46 |   | 6.016 |   | Up to 100 | % |
| Equity Securities      |       | 10.36                                                                     |       | 847 |   | 8.56 |   | 603 |   | Up to 20 | % |
| Real Estate            |       | 3.01                                                                      |       | 246 |   | 3.03 |   | 213 |   | Up to 8 | % |
| Participant loans      |       | 3.00                                                                      |       | 246 |   | 2.95 |   | 208 |   | Up to 15 | % |
|                   |       |                                                                      |       |   |   |   |   |   |   |   |   |
| Total                  |       | 100.00                                                                    | %          | 8,178 |   | 100.00 | % | 7,040 |   |   |   |

 

Investment policies:

 

·                  FORLUZ Investment Committee determines investment guidelines;

·                  Investment objectives: achieve the minimum actuarial yield (IPCA/IPEADplus 6% per year), in both long and short terms;

·                  Types of allowed investments: Fixed income — low credit risk assets,shares, real estate and loans to participants;

·                  Types of investments not allowed: medium and high credit risk assets,foreign currencies and others according to the Brazilian legislation;

·                  Use of derivatives: with the purpose of hedging exposures to significantrisks.

 

Benchmarks for investing plan assets:

 

·                  Debt securities:  Market quotations- CDI, IGP-M, INPC (1), IPCA/IBGE (2);

·                  Equity securities: Market quotations for traded securities and estimatedselling price for non-traded securities - Average IBOVESPA (3);

·                  Real Estate: Estimated selling price, based on external appraisal reports- IPCA/IPEAD + 6% per year;

·                  Participant loans: Recorded using contractual terms of the respectiveparticipant agreements. These loans have floating rates, which approximatemarket rates - IPCA/IPEAD + 10.03% per year.

 

----

(1)          *IndiceNacional de Preços ao Consumidor* — INPC (Consumer Price National Index)

(2)          *Indice de Preços ao Consumidor Amplo*- IPCA (Consumer Price Index calculated by the BrazilianInstitute of Geography and Statistics — IBGE)

(3)          *Indiceda Bolsa de Valores de São Paulo*— IBOVESPA (Index whichrepresents the variation of the main shares negotiated on Sâo Paulo Stockexchange)

 

F-40

----

Table of Contents

 

As of December 31, 2009 and 2008, the pensionplan assets include securities issued by CEMIG as follows:

 
| ** ** | ** ** | **Defined benefit pension plan** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **December 31, 2009**       | ** ** | **December 31, 2008** | ** ** |
|       |       |                             |       |   |   |
| Debentures |       | 256                              |       | 354 |   |
| Shares     |       | 10                               |       | 29 |   |
|       |       | 266                              |       | 383 |   |

 

Assumptions used by the Company in 2009 and 2008 for itsdefined benefit pension plans were as follows (percentage including projectedinflation of 5% per annum):

 
| ** **                            | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Actuarial method                      |       | Projected Unit Credit |       | Projected Unit Credit |       |
| Annual discount rate                  |       | 10.76                 |       | 10.24                 |       |
| Annual expected return on plan assets |       | 11.34                 |       | 12.32                 |       |
| Annual salary increase                |       | 6.08                  |       | 6.08                  |       |
| Annual increase in benefits           |       | 4.00                  |       | 4.00                  |       |
| Mortality rate                        |       | AT - 2000             |       | AT - 83               |       |
| Disability rate                       |       | Light Medium          |       | Light Medium          |       |
| Disable mortality rate                |       | IAPB-57               |       | IAPB-57               |       |
| Expected annual turnover rate         |       | 2.00                  |       | 2.00                  |       |

 

The rationale used in determination of long-term returnon assets rate described above is based in the asset managers mid to long-termexpectations and the Brazilian government bonds rates, reduced by 2% or 3% asthe Company deemed reasonable.

 

CEMIG’s obligation related to its post-retirementhealth care plan is calculated using a defined annual contribution per employeeduring the rest of their lives. The contribution amount is not based on theincrease or decrease in medical care cost. If the predetermined contributionsdo not cover future benefit expenses, CEMIG’s employees will be required tomake additional contributions or the related medical benefits will be reduced,in accordance with an agreement between CEMIG and the labor union relating tothe health care plan.

 

Estimated Future Benefit Payments:

 

The following benefit payments, which reflect expected future service,as appropriate, are expected to be paid:

 
| ** **          | ** ** | **Pension benefits** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|---------------------|------------|----------------------|------------|-----------------------------------------------------------------|------------|
| 2010                |       | 442                  |       | 42                                                              |       |
| 2011                |       | 438                  |       | 44                                                              |       |
| 2012                |       | 434                  |       | 46                                                              |       |
| 2013                |       | 429                  |       | 48                                                              |       |
| 2014                |       | 424                  |       | 50                                                              |       |
| 2015 and thereafter |       | 2,024                |       | 292                                                             |       |
|                |       | 4,191                |       | 522                                                             |       |

 

Contribution:

 

The Company expects to contribute R$161 to its pension plan and R$42 topost-retirement health care, insurance and dental benefits plan in 2009.

 

F-41

----

Table of Contents

 

**17. ACCRUED LIABILITY FORCONTINGENCIES**

 

CEMIG and its subsidiariesare party to certain legal proceedings in Brazil arising in the normal courseof business, regarding tax, labor, civil and other issues. The Company believesthat any loss in excess of the amounts provided for in respect of suchcontingencies will not have a material adverse effect on the Company’s resultsof operations or financial position. For those contingencies for which anadverse outcome has been deemed probable based on the assessment of managementand the Company’s legal counsel, the Company has recorded provisions for lossesas follows:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Labor Claims**                          |       |                  |       |   |   |
| Various                                   |       | 81                    |       | 82 |   |
|                                      |       |                  |       |   |   |
| **Civil Lawsuits**                        |       |                  |       |   |   |
| Personal  Injury                          |       | 27                    |       | 35 |   |
| Rate  Increase                            |       | 234                   |       | 78 |   |
| Other                                     |       | 107                   |       | 109 |   |
|                                      |       | 368                   |       | 222 |   |
| **Tax**                                   |       |                  |       |   |   |
| FINSOCIAL                                 |       | 21                    |       | 21 |   |
| Taxes  payable — Suspended Liability |       | 85                    |       | 77 |   |
| Other                                     |       | 18                    |       | 14 |   |
| ** **                                |       | 124                   |       | 112 |   |
| **Regulatory**                            |       |                  |       |   |   |
| ANEEL  Administrative Proceedings         |       | 74                    |       | 56 |   |
| **Total**                                 |       | 647                   |       | 472 |   |
|                                      |       |                  |       |   |   |
| Current liabilities                       |       | 128                   |       | — |   |
| Noncurrent liabilities                    |       | 519                   |       | 472 |   |

 

Certaindetails relating to such provisions are as follows:

 

(a) LaborClaims:

 

The labor claims relateprincipally to overtime and hazardous occupation compensation besides indemnityfor personal injury litigation and property damages.

 

(b) RateIncrease

 

Anumber of industrial consumers have brought legal action against the Companyseeking refunds of amounts paid to CEMIG as a result of a rate increase thatbecame effective during the Brazilian government’s economic stabilization “CruzadoPlan” in 1986, alleging that such increases violated the price controlsinstituted as part of that plan. CEMIG determines the amounts to be reservedbased on the amount billed subject to consumers’ claims and recent courtdecisions. The rate increase claim’s provision is R$234 as of December 31, 2009 (R$78 on December 31, 2008).

 

Therewas a legal action between CEMIG and one of the industrial consumers (inapproximately amount of R$239 in 2006) related to an increase rate occurredduring the Cruzado Economic Plan, by Ministerial Order 045/86. In May 2010CEMIG Distribuição closed an agreement pursuant to which CEMIG agreed to payR$177 to that consumer.

 

Theamount will be settled as the following: i) offset of the opening invoiceswhich corresponds to an approximately R$92; and ii) deduction in future invoices for supply of electricity and use ofthe distribution system in the amount of R$85.

 

(c) Taxespayable — Suspended Liability

 

Therecorded provision of R$84 as of December 31, 2009 (R$74 as of December 31,2008) is related to the deduction of the social contribution tax paid in thecalculation of income tax. CEMIG had a preliminary court order granted by theEighth Civil Court of the Federal Justice, on April 17,1998, for theexemption of payment, however in 2010 CEMIG lost this exemption.

 

F-42

----

Table of Contents

 

(d) ANEELAdministrative Proceedings

 

OnJanuary 9, 2007, ANEEL notified Cemig Distribuição S.A. that it consideredcertain criteria adopted by the Company in calculation of the revenue fromsubvention for low-income consumers to be incorrect, questioning the criteriafor identification of the consumers who should receive the benefit and also thecalculation of the difference to be reimbursed by Eletrobrás, in the estimatedamount of R$143. The Company has made a provision corresponding to the lossthat it considers probable in this dispute, in the amount of R$47 as of December 31,2009 (R$44 as of December 31, 2008).

 

(e) OtherCivil lawsuits

 

Severalcivil claims were brought by people who have suffered damages arising mainlyfrom accidents that occurred during the ordinary course of CEMIG business anddamages suffered as a result of the interruption of the supply of energy tothem. The provision as of December 31, 2009 represents the potential lossrelating to these matters.

 

Amongthe civil cases is an action for damages for a fire at a grazing farm, causedby the disruption of a power cord. The probable loss of R$34 is entirelyprovisioned.

 

(f) Contingenciesfor which an adverse outcome has been deemed remote or reasonably possible

 

CEMIGhas other relevant legal proceedings against it for which the Company considersan unfavorable outcome to be remote or reasonably possible. The Company doesnot expect to incur any material losses with respect to these contingencies andtherefore the Company has not recorded any accruals for such claims. Certaindetails relating to such matters are as follows:

 

(I) Income and social contribution taxes on post retirementbenefits

 

On October 11, 2001, the Brazilian Federal Tax Authorities(Secretaria da Receita Federal) issued an assessment notice, in the updatedamount of R$330, arising from the utilization of tax credits that resulted fromthe amendment of the Company’s 1997, 1998 and 1999 tax returns. The tax returnswere amended as a result of a change in the accounting method for recordingpost-retirement benefit liabilities. The additional liabilities that resultedfrom the accounting change were recognized in the revised tax returns,resulting in tax loss carryforwards.

 

CEMIG presented an administrative appeal in the Finance MinistryTaxpayers’ Council (Conselho de Contribuintes do Ministério da Fazenda),obtaining a favorable decision for the years 1997 and 1998 and an adversedecision to 1999. This adverse decision would result in a reduction of the taxloss carryforwards, recognized as tax credits, in the historic amount of R$27.No reserve has been recorded as a result of this assessment notice, since theCompany believes that the procedures which generated the tax credits arelegally sound. An adverse outcome in this matter has been deemed remote.

 

The tax credits mentioned in the preceding paragraph were offsetagainst federal taxes paid in 2002 and 2003. Due to this offset, CEMIG isexposed to additional penalties in the amount of R$298 as of December 31,2009 (R$286 as of December 31, 2008). No reserve for contingencies hasbeen made to cover any liabilities that may result from the tax assessment,since CEMIG believes that it has solid legal grounds that support theprocedures adopted. An adverse outcome in this matter has been deemed remote.

 

(II) ITCD — Imposto deTransmissão Causa Mortis e Doação (Inheritance and Donation Tax)

 

The State of Minas Gerais assessed the Company for the non-payment ofthe tax named ITCMD — Imposto de Transmissão Causa Mortis e Doação (Inheritanceand Donation Tax), in the amount of R$198 as of December 31, 2009 (R$141as of December 2008). No reserve has been recorded for these claims, sincethe Company believes that the probability of an adverse outcome in this matterhas been deemed remote.

 

F-43

----

Table of Contents

 

(III) Regulatory agency acts

 

ANEEL has filed regulatory proceeding against CEMIG claiming that CEMIGowes the Federal Government R$1,157 as of December 31, 2009 (R$1,033 as ofDecember 2008) due to a miscalculation of credits in the amount of thecumulative rate deficit (CRC) applied to reduce amounts owed to the FederalGovernment. On October 31, 2002, ANEEL issued a final administrativedecision against the Company. On January 9, 2004, the Brazilian TreasuryAuthority (“Secretaria do Tesouro Nacional”) issued an official collectionnotice for the amount referred to, to be paid before January 30, 2004. TheCompany did not make such payment since it believes that the likelihood of anadverse outcome is possible, but not probable.

 

On November 14, 2003, the Federal Public Auditing Court, which hasthe authority to audit any decision by ANEEL that may impact public finance,initiated an administrative proceeding against ANEEL to evaluate the criterionadopted by ANEEL in the Energy Consumption Reduction Emergency Program(Programa Emergencial de Redução de Consumo de Energia Elétrica), or PERCEE.The Federal Public Auditing Court has asked the Company to provide certaininformation with respect to its rates, which, according to the Federal PublicAuditing Court, were mistakenly approved by ANEEL. In addition, the FederalPublic Auditing Court contested the index and the X Factor applied by ANEEL inthe Company’s rate revision of 2003.  TheCompany has filed an administrative proceeding before the Federal PublicAuditing Court to challenge this decision.

 

The potential loss resulting from the inability to provide support forthese rates amounts to R$85. The Company has not recorded a provision relatingto this matter as the likelihood of an adverse outcome is possible, but notprobable.

 

(IV) Social Security and taxobligations — indemnity for the “Anuênio” and profit shares

 

CEMIG and its subsidiariesCemig Geração e Transmissão S.A. and Cemig Distribuição S.A. paid an indemnityto the employees in 2006, in the amount of R$178, in exchange for the rights tofuture payments known as “Anuênios” which would be incorporated into salaries.The Company and its subsidiaries did not make the payments of income tax andsocial security contribution on this amount because it considered that theseobligations are not applicable to amounts paid as indemnity. However, to avoidthe risk of a future fine arising from a different interpretation by theFederal Tax Authority, the Company and its subsidiaries decided to file fororders of mandamus to allow payment to the Court of the amount of any obligations,in the amount of R$167 as of December 31, 2009 (R$155 December 31,2008), posted in Deposits connected to legal actions in Long term assets. Noprovision was made for possible losses in this matter since the company and itssubsidiaries classify the risk of loss in this action as possible, but notprobable.

 

InSeptember 2006 CEMIG was notified by the Social Security NationalInstitute, INSS, as a result of the non-payment of the Social Securitycontribution on the amounts paid as profit sharing in the period 2000 to 2004,representing R$122 as of December 31, 2009 (R$112 as of December 2008). The Company appealed in the administrative sphere against thedecision. No provision has been constituted since CEMIG believes it hasarguments on the merit for defense, and the adverse outcome in this action isconsidered to be possible, but not probable.

 

(V) Value-added tax

 

Since 2002 the Company has received a subvention from Eletrobrás inrelation to the discounts given to low income consumers. The Minas Gerais stateoffice of the Federal Tax Authority served an infringement notice on CEMIG, onthe argument that the subvention should be subject to the value-added tax(ICMS), in the total amount of R$143 as of December 31, 2009 (R$130 as of December 2008).No provision was constituted for the result of this dispute, since the companybelieves that it is not a legal obligation and that it has arguments on themerit for defense against this demand. The Company believes that the likelihoodof an adverse outcome in this matter is possible, but not probable.

 

Cemig was served an infringement notice, as a co-responsible party, inrelation to sales of excess electricity by industrial consumers during theperiod of electricity rationing, in which the Minas Gerais State Tax Authoritydemanded payment of the ICMS tax on these transactions, in the amount of R$49as of December 31, 2009 (R$18 as of December 2008). If the Companydoes have to pay the ICMS on these transactions, it can charge consumers thesame amount to recover the amount of the tax plus any possible penalty charge.The expectation of loss in this matter is possible, but not probable.

 

F-44

----

Table of Contents

 

(VI) The ISS tax on services

 

The company is involved in litigation with the City Hall of BeloHorizonte on the criteria for applicability of the ISS tax on services carriedout by the Company. The amount involved in the action is R$42 as of December 31,2009 (R$33 as of December 2008). No provision has been constituted since CEMIG believes it has arguments on the merit for defense. The expectation of loss inthis matter is possible, but not probable.

 

(VII) Regulatory contingency — CCEE

 

In an action dating from August 2002, AES Sul Distribuidora haschallenged in the courts the criteria for accounting of electricity saletransactions in the wholesale electricity market during the period ofrationing. It obtained a judgment in its favor in February 2006, whichorders the CCEE to recalculate the transactions during the rationing periodleaving out of account its Dispatch No. 288/2002. This was to be put intoeffect in the CCEE in November 2008, resulting in an additionaldisbursement for CEMIG, referring to the expense on purchase of energy in theshort-term market, in the CCEE, in the amount of approximately R$95 as of December 31,2009 (R$76 as of December 2008). On November 9, 2008 the Companyobtained an injunction in the Regional Federal Court suspending the obligatorynature of the requirements to pay into court the amount owed arising from theSpecial Financial Settlement carried out by the CCEE. No provision has been constituted since CEMIG believes it has arguments on the merit for defense. The expectation of loss inthis matter is possible, but not probable.

 

(VIII) Civil lawsuits - Consumers

 

Various consumers and the Public Prosecutor of Minas Gerais havebrought civil claims against CEMIG contesting rate adjustments applied in prioryears, including rate subsidies granted to low-income consumers, the specialrate adjustment, the inflationary index used to increase the electric rates in April 2003and double reimbursement for any amounts that the Company found to havewrongfully collected and substitution of current adjustment index contained inthe concession agreement as well as a revision of the methodology forcalculation of the “X” Factor. The amounts involved in these claims is R$1,910.The Company believes that the likelihood of an adverse outcome in this matteris remote.

 

The Company is the defendant in suits challenging the charging of taxon public lighting. These claims total an estimated amount of R$909 as of December 31,2009 (R$526 as of December 2008). The Company believes that the likelihoodof an adverse outcome in this matter is possible, but not probable.

 

Through popular action that questions the Terms of Adjustment ofConduct signed between CEMIG and prosecutors, is required to return the amountspaid to service providers of the Company that runs the program Light for All tothe Federal Government. The amount involved in the action is R$1,654 as of December 31,2009 (R$1,441 as of December 2008). No provision has been constituted since CEMIG believes it has arguments on the merit for defense. The expectation of loss inthis matter is possible, but not probable.

 

(IX) Value-added tax (ICMS)

 

The Company received an infringement notice from the Minas Gerais statetax authority alleging undue use of the value-added tax (ICMS), relating to theacquisition of assets in Property, plant and equipment, in the months ofJanuary, March, April, May, and July to November 2004. The Companyimpugned this in administrative proceedings within the legal period. Theexpectation of loss in this matter is possible, but not probable. The amount ofthe case is R$55 as of December 31, 2009.

 

(g) Environmental Matters

 

CEMIGhas some legal proceedings related to Environmental Matters. Certain detailsrelating to such matters are as follows:

 

Acertain environmental association has brought a public civil action claimingindemnity for supposed collective environmental damage from the constructionand operation of the Nova Ponte Hydroelectric Plant. The amount involved in theaction is R$1,081 as of December 31, 2009 (R$941 as of December 2008).No provision has been recorded since CEMIG believesit has arguments on the merit for defense. Theexpectation of loss in this matter is possible, but not probable.

 

F-45

----

Table of Contents

 

**18.          SHAREHOLDERS’ EQUITY**

 

(a) Capitalstock:

 
| ** **                          | ** ** | **Year ended December 31,****(thousands of shares)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| PREFERRED SHARES:                   |       |                                                      |       |   |   |   |   |
| Balance                             |       | 349,222,649                                               |       | 349,170,804 |   | 342,246,847 |   |
|                                |       |                                                      |       |   |   |   |   |
| COMMON SHARES:                      |       |                                                      |       |   |   |   |   |
| Balance                             |       | 271,154,243                                               |       | 271,154,243 |   | 265,778,129 |   |
|                                |       |                                                      |       |   |   |   |   |
| TREASURY STOCK  (Preferred shares): |       |                                                      |       |   |   |   |   |
| Balance                             |       | (207,384                                                  | )          | (207,384 | ) | (207,384 | ) |
| Total                               |       | 620,169,508                                               |       | 620,117,663 |   | 607,817,592 |   |

 

At December 31, 2009, the State Government owned51% of the Company’s common shares and 2% of its preferred shares, equal to 23%of total capital. The holders of the preferred shares are not entitled to voteat shareholders’ meetings, but the shares have priority in the repayment ofcapital upon liquidation and are entitled to a minimum annual dividend asdescribed in Note 18 (d.1).

 

On April 29,2008, the Annual General Meeting approved the capital increase through the useof Earnings Reserve so as to comply with Article 199 of the Corporate Law,which limits the amount of the reserves to the amount of the Company’sregistered capital. Therefore, the recorded capital of CEMIG, according to theBrazilian Corporate Law, increased from R$2,432 to R$2,481 with issuance of9,840,057 new shares to existing shareholders in proportion to their relativeownership, through capitalization of R$49 of the balance on the Capital Reservefor Donations and Subsidies for Investments, distributing as a consequence toshareholders a bonus of 2.02%, in new shares, of the same type as those held,and with nominal value R$5.00.

 

OnApril 29, 2009, the Annual General Meeting approved the capital increase through the use ofthe Earnings Reserve so as to comply with Article 199 of the CorporateLaw, which limits the amount of the reserves to the amount of the company’sregistered capital. Therefore, the recorded capital of CEMIG, according to theBrazilian Corporate Law, increased from R$2,481 to R$3,102 with issuance of 124,075,378 new shares to existing shareholders inproportion to their relative ownership,through capitalization of R$606 of the balance on the RetainedEarning Reserve and R$15 of the balance onthe Capital Reserve, distributing as aconsequence to shareholders a bonus of 25%, in new shares, of the same type asthose held, and with nominal value R$5.00.

 

(b) Additionalpaid-in capital:

 

The balance refers topremium received by the Company when shares were issued.

 

(c) Appropriatedretained earnings:

 

The following describes certain reserves that areincluded in shareholders’ equity:

 

Fiscalincentive investment reserve - this reserve results from an option to designatea portion of income tax otherwise payable for investment in government-approvedprojects and it is recorded in the following year the taxable income is earned.Under Brazilian GAAP, the amount designated for investments is recorded as anasset and credited directly to this reserve. This balance is restricted forcapital increase. Under U.S. GAAP, this investment tax credit was originallycredited to income and then transferred from unappropriated retained earningsto this reserve.

 

Rate shortfall reserve - this represents theaccumulated rate shortfall reimbursement recorded under therate-setting system in force up to March 1993.

 

F-46

----

Table of Contents

 

Legal reserve - this reserve is a requirement forall Brazilian corporations and represents the appropriation of 5% ofannual net income up to a limit of 20% of share capital. This appropriation isnot required in the fiscal year in which this legal reserve balance, added tothe other established capital reserves, exceeds 30% of the paid-in capital,which has been the case with respect to 2009. However, the Company opted toappropriate 5.00% of December 31, 2009 net income, according to Braziliancorporate law, in the amount of R$93.

 

(d) Unappropriatedretained earnings:

 

This balance represents retained earningsdetermined in accordance with U.S. GAAP after (i) the allocation of theamount for legal reserve (when required) as described in Note 18 (c); (ii) allocationor transfer to or from other reserves; and (iii) dividends and interest oncapital in lieu of dividends as described in Note 18 (d.1).

 

(d.1) Dividends andinterest on capital in lieu of dividends:

 

The Company pays 50% of adjusted net income asmandatory dividends. Additionally, the Company distributed extraordinary dividends,to the extent that cash is available, as determined by the Board of Directors,subject to the guidelines of the Company Directive Plan. Declared dividends arepaid in two equal installments, the first on June 30 and the second on December 30of the year subsequent to the profit generation.

 

Each preferred share is entitled to an annualdividend equal to the greater of 10% of par value per preferred share or 3% ofthe book value of such preferred share, also based on the financial statementsprepared in accordance with Brazilian GAAP. This preferred dividend haspriority over the allocation of the mandatory dividend amount for the relevantperiod.

 

After payment of the preferred dividend, theremainder of the mandatory dividend amount, if any, is allocated first to thepayment of an annual dividend to the holders of common shares in an amount upto the annual cash dividend guaranteed to the preferred shares.  If a portion of the mandatory dividend amountremains after the payment of the common dividend, the remaining funds are to bedistributed on an equal, pro rata basis with respect to all preferred sharesand common shares.

 

The Company may also pay interim dividends toholders of preferred shares and common shares. Any interim dividends paid willcount toward the calculation of the dividend payable for the fiscal year inwhich 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 ofdividends received by certain holders of preferred shares and common shareswith respect to any fiscal year will equal at least 6% of the par value of thepreferred shares and the common shares. Accordingly, even if net income, based on the Company’s financialstatements prepared in accordance with Brazilian GAAP, is zero with respect toany fiscal year, some of CEMIG’s shareholders will receive a dividend of 6%.This guarantee applies only to private holders of shares and not to public orgovernmental holders.

 

Under the Brazilian Corporate Law, if the Companydoes not distribute the minimum preferred dividends for three consecutiveyears, the preferred shares become entitled to vote.

 

Effective December 26, 1995, Brazilian lawallows the deductibility of interest on capital paid to shareholders for incometax purposes, provided such interest is computed based on the BrazilianLong-term Interest Rate (TJLP), effective in the year the interest on capitalis computed.

 

In 2009, 2008 and 2007, the minimum dividendrequirements have been met and dividend distributions have been made on anequal, pro rata basis with respect to all preferred shares and common shares.

 

Under USGAAP, the Company declared dividends andinterest on capital in lieu of dividends as follows:

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                    |       |                             |       |   |   |   |   |
| Regular Dividends       |       | 931                              |       | 943 |   | 867 |   |
| Extraordinary dividends |       | —                           |       | — |   | 497 |   |
| Total                   |       | 931                              |       | 943 |   | 1,364 |   |

 

The Company reverted the dividends not claimed bythe 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 are “de minimis”.

 

F-47

----

Table of Contents

 

(e) Earnings per share - Since eachclass of shares participates equally in earnings in the years presented,earnings per share was computed by dividing net income by the weighted averagenumber of common and preferred shares outstanding during the year. Consistentwith many other Brazilian corporations, CEMIG discloses earnings per onethousand shares, as this is the minimum number that can be traded on the Bolsade Valores de São Paulo (the São Paulo Stock Exchange, or “BOVESPA”).

 

Asmentioned in Note 3, the Company has a contingent obligation to issue capitalstock in connection with payments received on the account receivable from theState Government. The issuance of such capital stock dividend will occurthrough the transfer of the balance in the Rate Shortfall Reserve account inappropriated retained earnings to capital stock, having no net effect onshareholders’ equity.

 

Thisaccounts receivable is currently being paid with dividends due to the StateGovernment. Shares to be issued in connection with this obligation areconsidered dilutive for purposes of calculating earnings per share only whenall necessary conditions for their issuance have been satisfied. The Companybelieves that as of the balance sheet date, all of the conditions for issuanceof a capital stock dividend in connection with payments received on theaccounts receivable from the State Government have not been satisfied since (i) theissuance of shares is still subject to approval by either CEMIG’s annual orextraordinary shareholders’ meeting, as required by Brazilian Corporate Law andCEMIG’s bylaws and (ii) CEMIG may use the Rate Shortfall Reserve accountfor other purposes, which would relieve the Company of the obligation to issuesuch capital stock dividend. Therefore, the Company has not included theseshares in the computation of basic earnings per share in accordance with FASBASC paragraph 260-10-45-13.

 

AtDecember 31, 2009 and 2008, the Company has the obligation to issue  shares in connection with dividends destinedto offset the related receivable that are included in the weighted averageshares outstanding. The following share information has been retroactivelyrestated to reflect the stock dividend:

 
| ** **                                                                                                       | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Basic weighted average common shares outstanding                                                                 |       | 271,154,243 |       | 271,154,243 |       |
| Basic weighted average preferred shares  outstanding                                                             |       | 349,015,265 |       | 348,963,420 |       |
|                                                                                                             |       | 620,169,508 |       | 620,117,663 |       |
| Dilutive effect common shares to be issued in  connection with the account receivable from the State Government. |       | 2,695,950   |       | 3,480,558   |       |
| Diluted weighted average shares outstanding                                                                      |       | 622,865,458 |       | 623,598,221 |       |

 

**19. NET OPERATING REVENUES**

 

(a) The composition of electric energy supplied by consumer class is asfollows:

 
| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **GWh (unaudited)**              | ** ** | **R$** | ** ** |
| ** **                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Residential                                           |       | 7,774                            |       | 7,164 |   | 6,813 |   | 4,014 |   | 3,389 |   | 3,529 |   |
| Industrial                                            |       | 22,113                           |       | 26,198 |   | 24,183 |   | 3,558 |   | 3,801 |   | 3,216 |   |
| Commercial                                            |       | 4,674                            |       | 4,423 |   | 4,111 |   | 1,998 |   | 1,898 |   | 1,865 |   |
| Rural                                                 |       | 2,208                            |       | 2,296 |   | 2,200 |   | 559 |   | 554 |   | 591 |   |
| Governmental entities                                 |       | 1,776                            |       | 1,737 |   | 1,678 |   | 563 |   | 553 |   | 562 |   |
| Public services                                       |       | 1,071                            |       | 1,073 |   | 1,060 |   | 306 |   | 294 |   | 297 |   |
| Own consumption                                       |       | 35                               |       | 35 |   | 34 |   | — |   | — |   | — |   |
| Unbilled, net                                         |       | —                           |       | — |   | — |   | (4 | ) | 8 |   | 131 |   |
|                                                  |       | 39,651                           |       | 42,926 |   | 40,079 |   | 10,994 |   | 10,497 |   | 10,191 |   |
| Electricity sales to the interconnected power  system |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Supply                                                |       | 14,039                           |       | 11,162 |   | 12,755 |   | 1,545 |   | 922 |   | 1,108 |   |
| Energy transactions on CCEE/MAE                       |       | —                           |       | — |   | — |   | 137 |   | 147 |   | 26 |   |
| Total                                                 |       | 53,690                           |       | 54,088 |   | 52,834 |   | 12,676 |   | 11,566 |   | 11,325 |   |

 

F-48

----

Table of Contents

 
| ** **            | ** ** | **Number of consumers (unaudited)** | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                  |       |                                |       |   |   |   |   |
| Residential           |       | 5,601,926                           |       | 5,400,214 |   | 5,188,604 |   |
| Industrial            |       | 75,180                              |       | 74,482 |   | 73,606 |   |
| Commercial            |       | 596,289                             |       | 578,021 |   | 560,910 |   |
| Rural                 |       | 490,140                             |       | 482,952 |   | 554,286 |   |
| Governmental entities |       | 59,694                              |       | 57,165 |   | 54,199 |   |
| Public services       |       | 8,474                               |       | 8,543 |   | 7,799 |   |
| Own consumption       |       | 824                                 |       | 829 |   | 829 |   |
|                  |       | 6,832,527                           |       | 6,602,206 |   | 6,440,233 |   |
| Supply                |       | 53                                  |       | 46 |   | 47 |   |
| Total                 |       | 6,832,580                           |       | 6,602,252 |   | 6,400,280 |   |

 

RateReadjustment

 

The impact of ratereadjustment in the bills of the consumers of Cemig Distribuição S.A. was anincrease by an average of 6.21% from April 8, 2009. In 2008, CEMIGrecognized as revenue an amount of R$93 due to this rate adjustment. Theadjustment was applied in different percentages by category of consumption forthe purpose of gradually eliminating, as stated in a letter by ANEEL, thecross-subsidies existing between consumer groups. As an example, residentialconsumers had an increase of 4.87% in their electricity bills, whilehigh-voltage consumers had an increase of 9.42%. The increase of the rates doesnot represent an increase of the CEMIG ́s operating revenues in the samepercentage because part of it is used to the regulatory assets settlement.

 

Low-income consumers

 

The Federal Government,through Centrais Elétricas Brasileiras — “ELETROBRAS” is reimbursingdistributors for billing losses incurred from 2002 resulting from the newclassification criteria established for low-income consumers due to the lowerrate applied to them.

 

ANEEL reviewed the procedures for calculation by theCompany of revenue for the subsidy for low-income consumers.  As a result of this review, the amountsposted in 2007 were calculated on the basis of estimate, and their receipt forthe period from February through November 2007 in the amount of R$119were received in February, 2009.

 

ANEELincluded in the tariff review of April 2008 the amounts to be reimbursedto the Company for the subsidy for low-income consumers as from that date.

 

(b) The compositionof other operating revenues is as follows:

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                           |       |                             |       |   |   |   |   |
| Telecom and cable TV  services |       | 115                              |       | 95 |   | 76 |   |
| Services rendered              |       | 84                               |       | 82 |   | 61 |   |
| Rental and leasing             |       | 60                               |       | 49 |   | 39 |   |
| Services rated                 |       | 16                               |       | 14 |   | 13 |   |
| Others                         |       | 2                                |       | 1 |   | 47 |   |
|                           |       | 277                              |       | 241 |   | 236 |   |

 

(c) The compositionof taxes on revenues is as follows:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                             |       |   |   |   |   |
| VAT (ICMS) |       | 2,440                            |       | 2,521 |   | 2,493 |   |
| COFINS     |       | 1,149                            |       | 1,080 |   | 1,088 |   |
| PIS-PASEP  |       | 260                              |       | 241 |   | 254 |   |
| Others     |       | 3                                |       | 2 |   | 1 |   |
|       |       | 3,852                            |       | 3,844 |   | 3,836 |   |

 

F-49

----

Table of Contents

 

(d) The compositionof use of basic transmission network is as follows:

 
| ** **                                             | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                   |       |                             |       |   |   |   |   |
| TUSD — Tariff for Use of  the Distribution System |       | 1,121                            |       | 1,266 |   | 1,173 |   |
| Use of basic transmission network                      |       | 627                              |       | 472 |   | 437 |   |
| Use of connection of basic transmission                |       | 132                              |       | 127 |   | 95 |   |
| Use of basic transmission network Tariff Review        |       | 119                              |       | — |   | — |   |
|                                                   |       | 1,999                            |       | 1,865 |   | 1,705 |   |

 

**20. OPERATING COSTS AND EXPENSES**

 

Someof the operating costs and expenses consist of the following:

 

(a) Electricitypurchased for resale:

 
| ** **                                                         | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                               |       |                             |       |   |   |   |   |
| Itaipu Binacional                                                  |       | 865                              |       | 776 |   | 1,000 |   |
| Initial contracts                                                  |       | —                           |       | — |   | 12 |   |
| Bilateral contracts                                                |       | 381                              |       | 233 |   | 149 |   |
| Incentive Program for Alternative Electric Power  Sources -PROINFA |       | 156                              |       | 123 |   | 65 |   |
| From suppliers though CCEE/MAE                                     |       | 252                              |       | 234 |   | 100 |   |
| System services charge                                             |       | 55                               |       | 51 |   | 20 |   |
| Energy Public Bids                                                 |       | 1,105                            |       | 706 |   | 780 |   |
| Parcel A and other sources (see Note 4)                            |       | 247                              |       | 144 |   | 21 |   |
|                                                               |       | 3,061                            |       | 2,267 |   | 2,147 |   |

 

(b) Personnel:

 
| ** **                                               | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                             |       |   |   |   |   |
| Salary and payroll charges                               |       | 1,007                            |       | 990 |   | 946 |   |
| Benefits                                                 |       | 128                              |       | 125 |   | 117 |   |
|                                                     |       | 1,135                            |       | 1,115 |   | 1,063 |   |
| Personnel costs transferred to construction in  progress |       | (151                             | )          | (161 | ) | (179 | ) |
|                                                     |       | 984                              |       | 954 |   | 884 |   |
| Voluntary Termination Program - “PPD”          |       | —                           |       | 50 |   | — |   |
| Temporary Voluntary dismissal program - “PDV”  |       | 206                              |       | — |   | — |   |
|                                                     |       | 1,190                            |       | 1,004 |   | 884 |   |

 

*Voluntary Termination Program (PPD)*

 

OnMarch 11, 2008, the Executive Board approved the permanent VoluntaryTermination Program (PPD), which applies to any free and spontaneousterminations of employment contracts as from that date. The program’s mainfinancial incentives include payment of 3 times the gross amount of monthlyremuneration, 6 months’ contributions to the Health Plan after leaving thecompany, deposit of the 40% “penalty” payment due on the balance of theGovernment Severance Indemnity Fund for Employees (“FGTS”) on termination of anemployment contract, and payment of up to 24 months’ contributions to thePension Fund and the National Social Security System after termination of thecontract, in accordance with certain criteria established in the regulations ofthe program.

 

Sincethis program has begun, in March 2008, 679 employees have joined it (143employees of Cemig Geração e Transmissão, 523 of Cemig Distribuição and 13 ofthe Cemig holding company), and a provision for the financial incentives in theamount of R$50 was fully recorded in 2008.

 

F-50

----

Table of Contents

 

*Temporary Voluntary Dismissal Program (PDV)*

 

In April 2009, CEMIG put in place itstemporary voluntary dismissal program (PDV), available to employees between April 22and June 5, 2009.

 

Employees who subscribe to the PDV receive afinancial incentive varying between 4 and 16 times their monthly remuneration,according to criteria established in the program’s regulations, of which theprincipal one is the time of contribution remaining for full retiremententitlement under the national social security system (INSS). The incentiveincludes payment of the contributions to the pension fund and the INSS up tothe date when the employee would have complied with the requirements forapplying for retirement benefit under the INSS (limited to five years), anddeposit of the obligatory “penalty” payment (applicable to dismissals) of 40%on the balance of the employee’s accumulated funds under the FGTS system.

 

Additionally, CEMIG guarantees full paymentof the costs of the group life insurance plan, for 6 months, and of the healthplan, for 12 months, from the date of leaving the company.

 

A total of 1,043 employees of the Companysubscribed to the program. A provision for the expenses for the financialincentives in the amount of R$206 was fully recognized in 2009.

 

Theaccounting for the voluntary programs is in accordance with SFAS No 146 “Accountingfor Costs Associated with Exit or Disposal Activities” (included in ASC Subtopic420-10).

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                               |       |                             |       |   |   |   |   |
| Voluntary Termination at the beginning of the year |       | —                           |       | — |   | — |   |
| Costs incurred and charged to expense              |       | 206                              |       | 50 |   | — |   |
| Costs paid                                         |       | (69                              | )          | (50 | ) | — |   |
| Liability at the end of the year                   |       | 137                              |       | — |   | — |   |

 

(c) Regulatorycharges:

 
| ** **                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                             |       |   |   |   |   |
| Fuel usage quota                   |       | 410                              |       | 364 |   | 330 |   |
| Global reserve for reversion quota |       | 165                              |       | 160 |   | 126 |   |
| Energy development account         |       | 372                              |       | 328 |   | 337 |   |
| ANEEL inspection fee               |       | 41                               |       | 41 |   | 37 |   |
| Charges for use of water resources |       | 154                              |       | 131 |   | 137 |   |
|                               |       | 1,142                            |       | 1,024 |   | 967 |   |

 

(d) Third-party Services

 
| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                  |       |                             |       |   |   |   |   |
| Tax collecting  agents/reading of measurers                           |       | 119                              |       | 107 |   | 101 |   |
| Marketing                                                             |       | 69                               |       | 61 |   | 64 |   |
| Maintenance and electric  conservation of installations and equipment |       | 134                              |       | 113 |   | 101 |   |
| Building maintenance                                                  |       | 43                               |       | 37 |   | 35 |   |
| Outsourcing services                                                  |       | 48                               |       | 35 |   | 19 |   |
| Transportation and fares                                              |       | 12                               |       | 11 |   | 8 |   |
| Lodging and feeding                                                   |       | 19                               |       | 19 |   | 17 |   |
| Security                                                              |       | 16                               |       | 15 |   | 14 |   |
| Management Consulting                                                 |       | 30                               |       | 19 |   | 13 |   |
| Maintenance of furniture                                              |       | 37                               |       | 28 |   | 26 |   |
| Maintenance of vehicle                                                |       | 23                               |       | 22 |   | 19 |   |
| Electric service                                                      |       | 27                               |       | 22 |   | 26 |   |
| Other                                                                 |       | 152                              |       | 116 |   | 107 |   |
|                                                                  |       | 729                              |       | 605 |   | 550 |   |

 

F-51

----

Table of Contents

 

(e) Other:

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                 |       |                             |       |   |   |   |   |
| Allowance for doubtful  accounts                     |       | 59                               |       | 57 |   | 93 |   |
| Disposal of fixed assets, net                        |       | 45                               |       | 30 |   | 40 |   |
| Provisions (reversion provision) for  contingencies- |       |                             |       |   |   |   |   |
| Labor claims                                         |       | —                           |       | 4 |   | 43 |   |
| Civil lawsuits — Consumers                      |       | (33                              | )          | 19 |   | 28 |   |
| ANEEL administrative proceedings                     |       | 17                               |       | 7 |   | 43 |   |
| Civil lawsuits — Other                          |       | 182                              |       | 59 |   | (6 | ) |
| Other                                                |       | (20                              | )          | 10 |   | 10 |   |
| Rentals                                              |       | 42                               |       | 39 |   | 34 |   |
| Grants and donations                                 |       | 39                               |       | 43 |   | 41 |   |
| Consumption — electric energy                   |       | 15                               |       | 15 |   | 17 |   |
| Advertising                                          |       | 26                               |       | 31 |   | 26 |   |
| CCEE/MAE contribution                                |       | 2                                |       | 4 |   | 3 |   |
| Other taxes (real estate, vehicle, etc)              |       | 46                               |       | 42 |   | 39 |   |
| General expenses                                     |       | 66                               |       | 50 |   | 61 |   |
|                                                 |       | 486                              |       | 410 |   | 472 |   |

 

**21. EMPLOYEE PROFIT SHARING**

 

The Company records employee profit sharing based on 3%of operational profit, adjusted for certain items specified by ANEEL in theAnnual Reporting Procedure (PAC) as the general criterion for payment of profitshares to employees for the years 2009 and 2008, paid by May 2010.Additionally, in the collective wage negotiations and agreements of November 2009and 2008, it was agreed with the unions that each employee would be paid anadditional payment.

 

Together with the 2009/2008 agreement, the 2010/2009agreement was signed, specifying the following:

 

· Linked to compliance with targets, the Company will distribute apercentage share of 6% of the operational profit, to be paid by May 2011.

· Each employee was paid, by March 2010, the greater of: 0.7 timeshis/her monthly remuneration, or R$5,000.00.

 

Under these agreements, the share in the profits of2009, 2008 and 2007, including the contribution to the pension plan payable onthese amounts, were R$233, R$362 and R$455, respectively.

 

F-52

----

Table of Contents

 

**22. FINANCIAL (EXPENSE) INCOME, NET**

 

Financial (expense) income consists of thefollowing:

 
| ** **                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Financial income-                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest of account receivable from State  Government , net of provision for losses |       | 149                              |       | 154 |   | 159 |   |
| Interest income                                                                     |       | 235                              |       | 256 |   | 177 |   |
| Late charges on overdue electricity bills,  recorded on the cash basis              |       | 151                              |       | 145 |   | 112 |   |
| Foreign exchange gains                                                              |       | 123                              |       | 13 |   | 118 |   |
| Monetary restatement on deferred regulatory assets                                  |       | 76                               |       | 215 |   | 520 |   |
| Gains on derivatives contracts                                                      |       | 4                                |       | 45 |   | 4 |   |
| Taxes on financial revenues                                                         |       | (40                              | )          | (45 | ) | (65 | ) |
| Financial compensation — RME                                                   |       | —                           |       | 83 |   | — |   |
| Other                                                                               |       | 106                              |       | 156 |   | 150 |   |
|                                                                                |       | 804                              |       | 1,022 |   | 1,175 |   |
| Financial expense-                                                                  |       |                             |       |   |   |   |   |
| Interest on loans and financing                                                     |       | (618                             | )          | (624 | ) | (644 | ) |
| Monetary restatement on deferred regulatory  liabilities                            |       | —                           |       | (31 | ) | (176 | ) |
| Financial transaction tax (CPMF)                                                    |       | —                           |       | (4 | ) | (66 | ) |
| Foreign exchange losses                                                             |       | (28                              | )          | (126 | ) | (12 | ) |
| Monetary restatement losses                                                         |       | (15                              | )          | (85 | ) | (47 | ) |
| Losses on derivative contracts                                                      |       | (89                              | )          | — |   | (171 | ) |
| Other expenses                                                                      |       | (163                             | )          | (135 | ) | (107 | ) |
|                                                                                |       | (913                             | )          | (1,005 | ) | (1,223 | ) |
| Financial income, net                                                               |       | (109                             | )          | 17 |   | (48 | ) |

 

Theforeign exchange gains and losses are substantially related to the variation ofthe *real* in relation to the U.S.dollar.

 

F-53

----

Table of Contents

 

**23. RELATED PARTY TRANSACTIONS**

 

TheCompany enters into a variety of related party transactions, the maintransactions are as follows:

 

Holding and Consolidated

 
| ** **                                                 | ** ** | **ASSETS** | ** ** | **LIABILITIES** | ** ** | **REVENUES** | ** ** | **EXPENSES** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|--------------|------------|
| **ENTITIES**                                               | ** ** | **2009**   | ** ** | **2008**        | ** ** | **2009**     | ** ** | **2008**     | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                       |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Distribuição S.A.***                    |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividends and interest on Capital                          |       | 202        |       | 682             |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Others                                                     |       | 22         |       | 12              |       | 10           |       | 10           |       | — |   | — |   | — |   | — |   |
|                                                       |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Geração e Transmissão S.A.***      |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividends and interest on Capital                          |       | 917        |       | 518             |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Others                                                     |       | 6          |       | —          |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
|                                                       |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***State  Government of Minas Gerais***                    |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Accounts receivable (1)                                    |       | 2          |       | 2               |       | —       |       | —       |       | 81 |   | 70 |   | — |   | — |   |
| Recoverable or payable taxes - VAT — current (2)      |       | 197        |       | 159             |       | 288          |       | 277          |       | (2,440 | ) | (2,521 | ) | — |   | — |   |
| Account receivable from Minas Gerais State  Government (3) |       | 1,824      |       | 1,801           |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Recoverable taxes — VAT — non current (2)        |       | 57         |       | 79              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Accounts receivable (4)                                    |       | 61         |       | 17              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Debentures  (5)                                            |       | —     |       | —          |       | 37           |       | 33           |       | — |   | — |   | — |   | — |   |
| Account  Securitization Fund (FIDC) (6)                    |       | —     |       | —          |       | 951          |       | 990          |       | — |   | — |   | — |   | — |   |
| Financing  — BDMG (7)                                 |       | —     |       | —          |       | 10           |       | 19           |       | — |   | — |   | — |   | — |   |
|                                                       |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Forluz***                                               |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Employee  post-retirement benefits — current (8)      |       | —     |       | —          |       | 82           |       | 75           |       | — |   | — |   | (176 | ) | (277 | ) |
| Employee  post-retirement benefits — non current (8)  |       | —     |       | —          |       | 1,308        |       | 1,765        |       | — |   | — |   | — |   | — |   |
| Others                                                     |       | —     |       | —          |       | 34           |       | 73           |       | — |   | — |   | — |   | — |   |
| Personnel  (9)                                             |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (44 | ) | (49 | ) |
| Administrative  Costs (10)                                 |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (15 | ) | (16 | ) |

 

----

Mainmaterial comments on the above transactions:
| (1)  | Sale  of electricity to the government of the state of Minas Gerais — transactions  on terms equivalent to those prevailing in the transactions with independent  parties, considering that the price of the energy is that defined by ANEEL  through a resolution referring to the company’s annual tariff adjustment.                                                                                       |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | The  transactions in ICMS tax posted in the financial statements refer to  transactions for sale of electricity and are carried out in conformity with  the specific legislation of the State of Minas Gerais.                                                                                                                                                                                                          |
| (3)  | Injection  of the credits of the CRC into a Receivables Fund in senior and subordinated  units. For more information please see Explanatory Note 3.                                                                                                                                                                                                                                                                     |
| (4)  | A  substantial portion of the amount refers to the renegotiation of a debit  originating from the sale of electricity to *Copasa*,  with provision for payment up to September 2012, and financial updating  (by the IGP-M inflation index + 0.5% per month).                                                                                                                                                      |
| (5)  | Private  issue of non-convertible debentures for R$ 120,000 thousand, updated by  the IGP—M inflation index, for completion of the Irapé hydroelectric plant,  with redemption after 25 years from the issue date. The amount at December 31,  2009 was adjusted to present value, as per Explanatory Note 14.                                                                                      |
| (6)  | Senior  units owned by third parties, in the amount of R$ 900,000, amortized in  20 half-yearly installments, from June 2006, with monetary updating by  the CDI rate plus interest of 1.7% p.a.   For more information please see Explanatory Note 3.                                                                                                                                              |
| (7)  | Financings  of the subsidiaries **Transudeste**  and **Transirapé** with maturity in 2019  (TJLP long-term interest rate + 4.5 p.a. and UMBNDES 4.54% p.a.), and of **Transleste**, in 2017 and 2025 (rates 5% p.a. and 10% p.  a.).                                                                                                                                                                               |
| (8)  | Part of  the contracts of Forluz are adjusted by the IPCA (Amplified Consumer Price)  Inflation Index of the IBGE (Brazilian Geography and Statistics Institute),  and part are adjusted based on the Salary Adjustment Index of the employees  of Cemig, Cemig GT and Cemig D, excluding productivity factors, plus 6% p.a.,  with amortization up to 2024. For more information please see Explanatory  Note 16. |
| (9)  | Cemig’s  contributions to the Pension Fund related to the employees participating in  the Mixed Plan (see Explanatory Note 16), calculated on the monthly  remunerations in accordance with the regulations of the Fund.                                                                                                                                                                                           |
| (10) | Funds  for annual current administrative costs of the Pension Fund in accordance  with the specific legislation of the sector. The amounts are estimated as a  percentage of the Company’s total payroll.                                                                                                                                                                                                          |

 

F-54

----

Table ofContents

 

**24. FINANCIAL INSTRUMENTS**

 

The Company manages its financial instrumentsthrough periodic monitoring of positions, diversification of counterparties andestablishment of credit limits by counterparty. Financial instruments, whichpotentially subject CEMIG to concentrations of credit risk are cash and cashequivalents for 2009 and 2008. CEMIG limits its credit risk associated withcash and cash equivalents by placing its investments with highly ratedfinancial institutions generally with short-term maturities.

 

(a) Cashand cash equivalents :

 

As of December 31, 2009 and 2008, cash and cashequivalents are stated at cost plus accrued interest and approximate fair value,given the short term maturities of these items.

 

(b) Financingand other financial instruments:

 

Based on interest rates currently available to CEMIG forbank financings with similar terms and average maturities, the fair value oflong-term financing at December 31, 2009 and 2008 is R$9,277 and R$6,440,respectively, compared to book values of R$9,277 and R$6,511, respectively.

 

(c) Derivative financial instruments:

 

TheCompany utilizes derivative financial instruments to protect its operationsfrom exchange rate risk. The derivative financial instruments are not used forspeculative purposes. As of December 31, 2009, the Company has derivativefinancial instruments (“swaps”) with financial institutions, in connection withpotential exchange losses resulting from the devaluation of the Brazilian realcompared to the U.S. dollar in the net notional amount of US$81 million (US$91million in 2008). The net realized and unrealized losses from these operationsfor 2009 in the net amounts of R$85 (R$28 in 2008 and R$167 in 2007), wererecorded as financial expenses.

 

Thetable below summarizes the Company’s derivative financial instruments and theunrealized losses recorded on these instruments as of December 31, 2009and December 31, 2008:

 
| ** **                                                | ** ** | ** **                                                                      | ** ** | ** **              | ** ** | **December 31, 2009**                  | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                                      | ** ** | ** **              | ** ** | **Unrealized Losses**                       | ** ** |
| **CEMIG’s********Right**                             | ** ** | **CEMIG’s********obligation**                                              | ** ** | **Maturity Date**       | ** ** | **Principal  amount  contracted-  million** | ** ** | **Fair Value** | ** ** |
|                                                      |       |                                                                            |       |                    |       |                                        |       |   |   |
| US$exchange gains or losses + rate(5.58% p.a. 7.48% p.a.) |       | R$100% of the CDI + ratefrom 1.50% p.a. to 3.01% p.a.                           |       | From04/2009  to 06/2013 |       | US$                                         | 38         |   | (78 | ) |
|                                                      |       |                                                                            |       |                    |       |                                        |       |   |   |
| R$106% of the CDI                                         |       | R$ or US$48% of the CDI or exchange gains or losses  (whichever is higher) |       | On04/2010               |       | R$                                          | 75         |   | — |   |
|                                                      |       |                                                                            |       |                    |       |                                        |       |   |   |
|                                                      |       |                                                                            |       |                    |       |                                        |       | (78 | ) |

 

F-55

----

Table ofContents

 
| ** **                                                       | ** ** | ** **                                                                      | ** ** | ** **            | ** ** | **December 31, 2008**                  |       |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                                      | ** ** | ** **            | ** ** | **Unrealized Losses**                       |       |
| **CEMIG’s********Right**                                    | ** ** | **CEMIG’s********obligation**                                              | ** ** | **Maturity Date**     | ** ** | **Principal  amount  contracted-  million** | ** ** | **Fair Value** |   |
|                                                             |       |                                                                            |       |                  |       |                                        |       |   |   |
| ¥ (Japanese Yen)exchange gains or losses + rate(3,90% p.a.) |       | R$pegged to the CDI  variation(111.00% CDI)                                     |       | On12/2009             |       | ¥                                      | 3,879      |   | 3 |   |
|                                                             |       |                                                                            |       |                  |       |                                        |       |   |   |
| US$exchange gains or losses + rate(5.58% p.a. 7.48% p.a.)        |       | R$100% of the CDI + ratefrom 1.50% p.a. to 3.01% p.a.                           |       | From04/2009to 06/2013 |       | US$                                         | 59         |   | (97 | ) |
|                                                             |       |                                                                            |       |                  |       |                                        |       |   |   |
| R$106% of the CDI                                                |       | R$ or US$48% of the CDI or exchange gains or losses  (whichever is higher) |       | On04/2010             |       | R$                                          | 75         |   | — |   |
|                                                             |       |                                                                            |       |                  |       |                                        |       |   |   |
|                                                             |       |                                                                            |       |                  |       |                                        |       | (94 | ) |
|                                                                  |            |                                                                                 |            |                       |            |                                             |            |  |  |  |  |

 

At December 31, 2009, the Company had recorded theamount of R$78 as other current liabilities, representing the fair value ofthese financial instruments at the respective balance sheet date.

 

(d) Otherfinancial instruments:

 

The carrying value of CEMIG’s other financialinstruments, in *reais*,approximates fair values at such dates reflecting the short-term maturity orfrequent repricing at December 31, 2009 and 2008 of these instruments.

 

**25. FAIR VALUE MEASUREMENTS**

 

On January 1, 2008, the Company adopted ASCTopic 820 (Statement 157), which increased the disclosures related to assetsand liabilities measured at fair value on a recurring basis.

 

ASC Topic 820 defines fair value, establishes aframework for measuring fair value and expands disclosure for each major assetand liability category measured at fair value on either a recurring ornonrecurring basis. The ASC clarifies that fair value is the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.

 

As such, fair value is a market-based measurement thatshould be determined based on assumptions that market participants would use inpricing an asset or liability. To increase consistency and comparability, thefair value hierarchy prioritizes the inputs used in measuring into three broadlevels as follows:

 

· Level1. Observable inputs such as quoted prices in active markets for identicalassets or liabilities;

 

· Level2. Inputs, other than the quoted prices in active markets, that are observableeither directly or indirectly; and

 

· Level3. Unobservable inputs in which there is little or no market data, whichrequire the reporting entity to develop its own assumptions.

 

F-56

----

Table of Contents

 

Following is a summary of instruments that are valued atfair value:

 
| ** **                            | ** ** | ** **                                         | ** ** | **Fair Value Measurements  at December 31, 2009 Using**                                              | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Description**                       | ** ** | **Balance at  December 31,********2009** | ** ** | **Quoted Prices in  Active Markets********for Identical  Assets (Level 1)** | ** ** | **Significant Other********Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** |
|                                  |       |                                               |       |                                                                                                      |       |   |   |   |   |
| **Assets**                            |       |                                               |       |                                                                                                      |       |   |   |   |   |
| **Cash  equivalents**                 |       |                                               |       |                                                                                                      |       |   |   |   |   |
| Bank deposit  certificates            |       | 3,631                                              |       | —                                                                                                    |       | 3,631 |   | — |   |
| Treasury Financial Notes (LFTs)       |       | 75                                                 |       | 75                                                                                                        |       | — |   | — |   |
| Overnight deposits                    |       | 105                                                |       | —                                                                                                    |       | 105 |   | — |   |
|                                  |       |                                               |       |                                                                                                      |       |   |   |   |   |
|                                  |       | 3,811                                              |       | 75                                                                                                        |       | 3,736 |   | — |   |
|                                  |       |                                               |       |                                                                                                      |       |   |   |   |   |
| **Liabilities**                       |       |                                               |       |                                                                                                      |       |   |   |   |   |
| Foreign  exchange swap contracts |       | 78                                                 |       | —                                                                                                    |       | 78 |   | — |   |

 

(a) Bank deposit certificates and Overnightdeposits:

 

The Company determines the fair values of its bankdeposit certificates and Overnight deposits using a discounted cash flow model.This model is primarily industry-standard model that consider variousassumptions, including time value and yield curve as well as other relevanteconomic measures. ASC Topic 820 requires that the valuation of derivative liabilities must take intoaccount the company’s own nonperformance risk. The counterparty nonperformancerisk was not considered in the fair value measurement by the Company due tomanagement considered it was not significant considering the entities’ creditrisk based on rating agencies.

 

(b) Foreign exchange swaps contracts:

 

The Company’s derivatives are valued using a discountedcash flow model that use as its basis readily observable market inputs, such astime value, forward interest rates, and current and forward market pricesforeign currency exchange rates.

 

Nonfinancial assets and liabilities: The fair value oflong lived assets is determined by estimating the present value of the expectedcash outflows by reference to observable market transactions. Fair value optionhas not been elected for any of the Company’s financial assets and liabilities.

 

**26. FINAL RESULT OF THE SECONDTARIFF REVIEW OF CEMIG DISTRIBUIÇÃO**

 

InMarch 2009 ANEEL homologated the final result of the tariff review ofCemig Distribuição S.A., the effects of which take place from April 2008.

 

Thefinal result of the Company’s second tariff review was an average reduction of19.62%, which compares with the average reduction of 18.09% applied on aprovisional basis in April 2008.

 

Asa result of the homologation of the final tariff review, ANEEL recalculated theamounts which, in its judgment, should have been those effectively recognizedin the Company’s tariff adjustment as from April 2008. The net effect ofthis homologation in the net income was in the amount of R$93 in 2008.

 

Theadjustments in the net profit, which relate principally to (i) thereduction in the value of the “Reference Company” used as a basis forreimbursement of the Company’s manageable costs and also from ANEEL (ii) thenew calculation criterion for reimbursement of financial regulatory assets viatariffs, with a consequence of discounts in the amounts that in the opinion ofthe regulatory agency, were included higher in the Company’s tariff rate.

 

F-57

----

Table ofContents

 

**27. TRANSMISSION TARIFF REVIEW OFCEMIG GERAÇÃO E TRANSMISSÃO**

 

CemigGeração e Transmissão first Tariff Review was approved by the Council of ANEELon June 17, 2009. In it, ANEEL set the percentage for repositioning of theCompany’s Permitted Annual Revenue (“RAP”) at an increase of 5.35%, backdatedto 2005.

 

ANEELadditionally established a financial component of R$158 to be paid to theCompany as the “Adjustment Portion” (“PA”) in 24 months. This is the backdatedeffect of the tariff repositioning over the period from July 1, 2005 to June 30, 2009. Thefirst installment, of R$86, was incorporated into the adjustment for the 2009—10cycle, and the second part, of R$72, will be compensated in the 2010—11adjustment.

 

Asand when amounts of the “Adjustment Portion” are received through the tariff,the Company transfers the corresponding amount recorded in Assets to the Incomestatement.  The record of accounting ofthe “Adjustment Portion” is as follows:

 
| ** **                                       | ** ** | ** **                                    | ** ** | **Components of the “Adjustment  Portion”** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|
| **Description**                                  | ** ** | **Balance at  December 31,********2008** | ** ** | **Additions**                                         | ** ** | **Amortization** | ** ** | **Balance at  December 31,********2009** | ** ** |
|                                             |       |                                          |       |                                                  |       |   |   |   |   |
| National Grid                                    |       | —                                        |       | 129                                                   |       | (35 | ) | 94 |   |
| Frontier areas                                   |       | —                                        |       | 14                                                    |       | (4 | ) | 10 |   |
| Other Transmission  Facilities (“DIT”) |       | —                                        |       | 15                                                    |       | — |   | 15 |   |
|                                             |       |                                          |       |                                                  |       |   |   |   |   |
|                                             |       | —                                        |       | 158                                                   |       | (39 | ) | 119 |   |
|                                             |       |                                          |       |                                                  |       |   |   |   |   |
| **Current**                                      |       |                                          |       |                                                  |       |   | ** ** | **83** | ** ** |
| ** **                                       |       |                                          |       |                                                  |       |   | ** ** | ** ** | ** ** |
| **Non****current**                               |       |                                          |       |                                                  |       |   | ** ** | **36** | ** ** |

 

Asspecified in the CEMIG Geração e Transmissão’s concession contract, thecalculations of the review were made on the basis of the whole of the CEMIGGeração e Transmissão ́s assets, and not only on the assets relating to the newfacilities.

 

**28. EXPOSURE AND RISK MANAGEMENT**

 

Asa Brazilian energy concessionaire, the Company operates in an environment inwhich factors such as corporate reorganization, new regulations issued bygovernmental bodies and consumer market changes are considered risk factors.

 

TheCompany established 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 provideother areas of strategic management with input concepts and procedures, andfactors that strengthen the company’s organizational control infrastructure.

 

Themain market risks which affect CEMIG’s operations are described as follows:

 

(a) Exchangerate risk

 

CEMIGand its subsidiaries are exposed to the risk of increases in exchange rates,mainly U.S. dollar against the real, significantly impacting its financialposition, results of operations, and cash flows. The Company has derivativefinancial instruments (“swaps”) with financial institutions in the amount ofR$8, equivalent to the notional amount of US$81. These financial instrumentspartially offset the exchange variation of the Brazilian real compared to theU.S. dollar for interest based on the CDI (See Note 24(c)). The exchange ratenet exposure is as follows:

 

F-58

----

Table of Contents

 
| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **U.S. Dollar**                                                  |       |                  |       |   |   |
| Financing                                                        |       | 171                   |       | 315 |   |
| ( - ) Contracted derivative instruments— notional  amounts  |       | 8                     |       | (63 | ) |
|                                                             |       |                  |       |   |   |
|                                                             |       | 179                   |       | 252 |   |
| **Japanese Yen**                                                 |       |                  |       |   |   |
| Financing                                                        |       | —                |       | 100 |   |
| ( - ) Contracted  derivative instruments—  notional amounts |       | —                |       | (100 | ) |
|                                                             |       |                  |       |   |   |
|                                                             |       | —                |       | — |   |
| **Other Currencies**                                             |       |                  |       |   |   |
| Financing                                                        |       |                  |       |   |   |
| Euro                                                             |       | 19                    |       | 30 |   |
|                                                             |       |                  |       |   |   |
|                                                             |       | 19                    |       | 30 |   |
|                                                             |       |                  |       |   |   |
| Net liabilities exposed to exchange rate risk                    |       | 198                   |       | 282 |   |

 

Theexposure to exchange rates shown above is reduced by the Company throughcontracts to sell electricity to free consumers, which are priced in U.S.dollars. These contracts represent annual revenue of approximately US$120million.

 

(b) Interestrate risk

 

CEMIGand certain subsidiaries are exposed to the risk of increases in internationalinterest rates, impacting their loans and financing denominated in foreigncurrencies with floating rates, mainly LIBOR, in the amount of R$36 (R$91 as ofDecember 31, 2008).

 

TheCompany is also exposed in 2009 to the risk of increases in interest rates onreal denominated financial liabilities, partially offset by real denominatedfinancial assets as follows:

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| **CEMIG’s exposure to domestic interest rates** | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Asset**                                            |       |                  |       |   |   |
| CRC Agreement                                        |       | 1,824                 |       | 1,801 |   |
| Short-term investments                               |       | 3,811                 |       | 1,798 |   |
| Deferred regulatory  assets                          |       | 442                   |       | 1,086 |   |
| Derivative instruments                               |       | 8                     |       | — |   |
|                                                 |       |                  |       |   |   |
| ** **                                           |       | 6,085                 |       | 4,685 |   |
| **Liabilities**                                      |       |                  |       |   |   |
| Financing (local currency)                           |       | 9,087                 |       | 6,066 |   |
| Derivative instruments                               |       | —                |       | 163 |   |
| ** **                                           |       |                  |       |   |   |
| ** **                                           |       | 9,087                 |       | 6,229 |   |
|                                                 |       |                  |       |   |   |
| Net liabilities exposed to interest rate risk        |       | (3,002                | )          | (1,544 | ) |

 

(c) Creditrisk

 

Therisk resulting from losses on doubtful receivables for CEMIG is considered low.A significant part of electricity sales is dispersed among a large number ofcustomers. The Company’s procedures to reduce overdue bills comprise theissuance of notices that bills are overdue, phone calls and negotiations topermit the collectability of bills that are in arrears. After these efforts areexhausted, CEMIG interrupts the energy supply.

 

F-59

----

Table ofContents

 

(d)Debt acceleration risk

 

TheCompany and certain of its subsidiaries have contracts for loans, financing anddebentures with certain restrictive clauses (covenants), usually applicable tosuch operations, related to compliance with economic-financial indices, cashflow generation and other indicators. The creditors have the right to declarethe early termination of CEMIG’s obligations and require the immediate paymentof all outstanding debts in the case of a violation of such restrictiveclauses. Two of these restrictive covenants were not complied with on December31, 2009, and the Company obtained formal consent (waiver) from the creditorthat it will not demand early maturity of the obligation prior to January 1,2011.

 

(e)****Risk ofnon-renewal of concessions

 

TheCompany has concessions for commercial operation of electricity generation,transmission and distribution services with the expectation, by the management,that ANEEL and/or the Mining and Energy Ministry will renew them. If therenewals of the concessions are not granted by the Regulatory Body or if thoseBodies renew them for requirement of additional costs (“concession forconsideration”), the present levels of profitability and activity could bealtered.

 

**29. SHAREHOLDERS’ AGREEMENT**

 

In1997, the State Government of Minas Gerais sold approximately 33% of theCompany’s common shares to a group of investors led by Southern Electric BrasilParticipações Ltda. (“Southern”). As part of this transaction the State ofMinas Gerais and Southern entered into a Shareholders’ Agreement that providedfor, among other things, the requirement of a qualified quorum to approvesignificant corporate acts, certain amendments to CEMIG’s by-laws, the issuanceof debentures and convertible securities, the distribution of dividends otherthan that provided for in the by-laws and changes to the corporate structure.

 

OnSeptember 1999, the State Government of Minas Gerais brought an annulmentaction, by way of a request for interim relief against the shareholders’agreement entered into with Southern in 1997. In 2003, the Supreme Court of theState of Minas Gerais annulled the referred to shareholders’ agreement. Theappeals filed by Southern are under the Federal Courts consideration.

 

**30. CONCENTRATIONS**

 

(a) Labor:

 

The majority of CEMIG’s work forces are members ofSINDIELETRO (employee labor union). CEMIG and SINDIELETRO negotiate acollective bargaining agreement on an annual basis, which includes wageincreases and profit sharing, along with other matters. The collectivebargaining agreement becomes effective in November of each year. The 2009collective bargaining agreement included a 4.88% (7.26% in 2008) average salaryincrease.

 

(b) Renewal of concession agreements:

 

TheMining and Energy Ministry (MME) has constituted a technical working group toanalyze the criteria that will be applied in the renewals of the concessionsfor generation, transmission and distribution expiring from 2015 onward.Suggestions will be sent to the National Energy Policy Council and, accordingto statements by the participants in this group, will have as their objectivethe reduction of tariffs for consumers. The Company has the expectation ofrenewal of its concessions, and is not yet able to estimate the effect on itsfinancial statements arising from this issue.

 

Sevenof the Company’s hydroelectric plants accounted for approximately 75% of itsinstalled electric generation capacity as of December 31, 2009.

 

F-60

----

Table of Contents

 
| **GENERATION  CONCESSIONS-** | ** ** | **Installed Capacity  (MW)(unaudited)** | ** ** | **Expiration Date**      | ** ** |
|------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|
| São Simão          |       | 1,710                                   |       | January 2015             |       |
| Emborcação         |       | 1,192                                   |       | July 2025                |       |
| Nova Ponte                   |       | 510                                     |       | July 2025                |       |
| Jaguara                      |       | 424                                     |       | August 2013              |       |
| Miranda                      |       | 408                                     |       | December 2016            |       |
| Três Marias             |       | 396                                     |       | July 2015                |       |
| Volta Grande                 |       | 380                                     |       | February 2017            |       |
| Irapé                   |       | 360                                     |       | February 2035            |       |
| Aimorés                 |       | 162                                     |       | December 2035            |       |
| Salto Grande                 |       | 102                                     |       | July 2015                |       |
| Others                       |       | 734                                     |       | July 2015 to August 2036 |       |
| ** **                   |       |                                    | ** ** | ** **               | ** ** |
| Total installed capacity     |       | 6,378                                   |       |                     |       |

 
| **DISTRIBUTION CONCESSIONS-** | ** ** | **Date concession  expires** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| Northern Region               |       | February 2016                |       |
| Southern Regional             |       | February 2016                |       |
| Eastern Region                |       | February 2016                |       |
| Western Region                |       | February 2016                |       |

 

**31. INSURANCE**

 

The Company has insurance policies for part of itsproperty, plant and equipment, as follows:

 
| **Risk**                                                                   | ** ** | **Coverage**          | ** ** | **Effective  Date**  | ** ** | **Insured  Amount (*)** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-------------------------|------------|
| Aircraft (Cemig  Geração e Transmissão) – 2009 to 2010 |       | Fuselage              |       | 05/25/09 to 04/29/10 |       | U$                      | 4          |   |
| Aircraft (Cemig  Geração e Transmissão) – 2009 to 2010 |       | Third party liability |       | 05/25/09 to 04/29/10 |       | U$                      | 10         |   |
| Warehouses and buildings – 2009 to 2010                               |       | Fire                  |       | 11/08/09 to 11/08/10 |       |                    | 731        |   |
| Aircraft (Cemig  Distribuição) – 2009 to 2010               |       | Fuselage              |       | 04/29/09 to 04/29/10 |       | U$                      | 6          |   |
| Aircraft (Cemig  Distribuição) – 2009 to 2010               |       | Third party liability |       | 04/29/09 to 04/29/10 |       | U$                      | 14         |   |
| Generators, turbines and equipment – 2009 to 2010                     |       | Total                 |       | 05/05/09 to 05/05/10 |       |                    | 1,954      | **(**)** |

 

CEMIG, except for the aeronautical segment, does not have general third-party liability insurance coveringaccidents and has not requested bids relating to this type of insurance. TheCompany has not requested bids for, nor does it carry, insurance coverage formajor catastrophes affecting its facilities such as earthquakes and floods, forbusiness interruption risk or system failures. In addition, the Company doesnot have insurance for losses incurred as a result of business interruptioncaused by a strike or other type of labor action.

 

The Company has not experienced significant lossesarising from the aforementioned risks.

 

----

**(*)** Unaudited

**(**)**The maximum limit of indemnity is R$187

 

**32. COMMITMENTS**

 

CEMIG has outstanding contractual obligations andcash commitments which include principal debt payment provisions, theobligation to purchase electricity for resale from Itaipu, the obligation totransfer and transport electric power from Itaipu as well as constructioncommitments. The following table provides information, as of December 31, 2009,about our contractual obligations and cash commitments.

 

F-61

----

Table of Contents

 
| ** **                                           | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **2016 and  beyond** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------------|------------|-----------|------------|
|                                                 |       |     |       |     |       |     |       |     |       |     |       |     |       |                 |       |      |       |
| Debt (1)                                             |       | 3,913    |       | 1,119    |       | 1,273    |       | 1,109    |       | 908      |       | 424      |       | 531                  |       | 9,277     |       |
| Derivative financial instruments (“swaps”) |       | 51       |       | 11       |       | 11       |       | 5        |       | —   |       | —   |       | —               |       | 78        |       |
| Purchase of Electricity from Itaipu (2)              |       | 899      |       | 842      |       | 863      |       | 897      |       | 925      |       | 722      |       | 18,761               |       | 23,909    |       |
| Transportation of Electric Power from Itaipu (2)     |       | 67       |       | 70       |       | 71       |       | 74       |       | 54       |       | 47       |       | 2,148                |       | 2,531     |       |
| Pension Plan Debt - Forluz                           |       | 82       |       | 70       |       | 66       |       | 43       |       | 46       |       | 48       |       | 549                  |       | 904       |       |
| “ Luz para todos”  (Light for all) Program |       | 499      |       | —   |       | —   |       | —   |       | —   |       | —   |       | —               |       | 499       |       |
| Regulatory  investments                              |       | 631      |       | 631      |       | 631      |       | 157      |       | —   |       | —   |       | —               |       | 2,050     |       |
| Electricity Power Purchase (3)                       |       | 2,525    |       | 3,003    |       | 3,969    |       | 4,605    |       | 4,318    |       | 4,181    |       | 112,344              |       | 134,945   |       |
| Total                                                |       | 8,667    |       | 5,746    |       | 6,884    |       | 6,890    |       | 6,251    |       | 5,422    |       | 134,333              |       | 174,193   |       |

 

----

(1)          In the event of our non-compliance with certaincovenants in our loan agreements, the total principal, future interest and anypenalties due under these agreements may become immediately due and payable.These amounts do not include interest payments on debt or payments underinterest rate swap agreements. The Company expects to pay approximately R$590in interest payments on debt in 2010. The Company does not believe projections of interest payments andpayments under interest rate swap agreements would be meaningful.

(2)          Contract with Furnas, denominated in U.S. dollars,to supply electric power purchased from Itaipu until May 2013. Amounts arecalculated based on the U.S. dollar exchange rate as of December 31, 2009.

(3)          It includes spot market, purchase through auctionsand bilateral agreements.

 

**33. SEGMENT INFORMATION**

 

Themain Company’s reportable segments are its generation and transmission, anddistribution segments.

 

The Company’s chiefoperating decision maker utilizes information prepared in accordance with BrazilianGAAP. Consequently, the Company has presented its segment information inaccordance with Brazilian GAAP, reconciled to U.S. GAAP. The operations of allreportable segments of the Company are conducted substantially in the State ofMinas Gerais, Brazil. Reportable segments are strategic business units thatoffer different products and services. Each of the reportable segments has aresponsible senior officer. All inter-segment activity has been eliminated.Financial information for each of the Company’s reportable segments for theyears ended December 31, 2009, 2008 and 2007 (only for the consolidatedstatements of operations and comprehensive income), is as follows:

 
| ** **                  | ** ** | **BRGAAP********2009** | ** ** | **Adjustment** | ** ** | **USGAAP********2009** | ** ** | **BRGAAP********2008** | ** ** | **Adjustment** | ** ** | **USGAAP********2008** | ** ** |
|-----------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|
| Identifiable assets         |       |                   |       |           |       |                   |       |                   |       |           |       |                   |       |
| Electricity                 |       |                   |       |           |       |                   |       |                   |       |           |       |                   |       |
| Distribution                |       | 13,398                 |       | (162           | )          | 13,236                 |       | 13,196                 |       | 149            |       | 13,345                 |       |
| Generation and Transmission |       | 11,503                 |       | 721            |       | 12,224                 |       | 8,281                  |       | 826            |       | 9,107                  |       |
| Other                       |       | 3,140                  |       | (39            | )          | 3,101                  |       | 2,340                  |       | (11            | )          | 2,329                  |       |
|                        |       |                   |       |           |       |                   |       |                   |       |           |       |                   |       |
| Total consolidated assets   |       | 28,041                 |       | 520            |       | 28,561                 |       | 23,817                 |       | 964            |       | 24,781                 |       |

 

TheCompany allocated the account receivable from Minas Gerais State Government tothe Distribution segment.

 

F-62

----

Table ofContents

 
| **2009**                                   | ** ** | **Power Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  operating revenues                    |       | 3,807                                        |       | 7,318                            |       | (114      | )          | 11,011     |       | 89             |       | 11,100     |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Operating  income                          |       | 2,206                                        |       | 625                              |       | (19       | )          | 2,812      |       | (293           | )          | 2,519      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Financial  income (expenses), net          |       | (197                                         | )          | —                           |       | 5         |       | (192       | )          | 83             |       | (109       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Income  tax — (Expense) Benefit       |       | (608                                         | )          | (135                             | )          | (136      | )          | (879       | )          | 72             |       | (807       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  income                                |       | 1,473                                        |       | 431                              |       | 43        |       | 1,947      |       | (179           | )          | 1,768      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Depreciation  and amortization charges     |       | (242                                         | )          | (357                             | )          | (30       | )          | (629       | )          | (82            | )          | (711       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Equity  method                             |       | —                                       |       | —                           |       | 206       |       | 206        |       | (41            | )          | 165        |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Additions to property, plant and equipment |       | 124                                          |       | 632                              |       | 70        |       | 826        |       | 25             |       | 851        |       |

 
| **2008**                                   | ** ** | **Power Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  operating revenues                    |       | 3,334                                        |       | 6,412                            |       | 93        |       | 9,839      |       | (11            | )          | 9,828      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Operating  income                          |       | 1,750                                        |       | 847                              |       | (101      | )          | 2,496      |       | (209           | )          | 2,287      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Financial  income (expenses), net          |       | (171                                         | )          | (12                              | )          | 68        |       | (115       | )          | 132            |       | 17         |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Income  tax — (Expense) Benefit       |       | (431                                         | )          | (226                             | )          | (126      | )          | (783       | )          | 28             |       | (755       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  income                                |       | 1,148                                        |       | 609                              |       | 55        |       | 1,812      |       | (59            | )          | 1,753      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Depreciation  and amortization charges     |       | (240                                         | )          | (354                             | )          | (26       | )          | (620       | )          | 149            |       | (769       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Equity  method                             |       | —                                       |       | —                           |       | 214       |       | 214        |       | (10            | )          | 204        |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Additions to property, plant and equipment |       | 96                                           |       | 716                              |       | 46        |       | 858        |       | 113            |       | 971        |       |

 

F-63

----

Table of Contents

 
| **2007**                                   | ** ** | **Power Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  operating revenues                    |       | 2,999                                        |       | 6,368                            |       | 111       |       | 9,478      |       | (48            | )          | 9,430      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Operating  income                          |       | 1,450                                        |       | 1,405                            |       | (51       | )          | 2,804      |       | (274           | )          | 2,530      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Financial  income (expenses), net          |       | (185                                         | )          | 10                               |       | 34        |       | (141       | )          | 93             |       | (48        | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Income  tax — (Expense) Benefit       |       | (298                                         | )          | (312                             | )          | (134      | )          | (744       | )          | 63             |       | (681       | )          |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Net  income                                |       | 857                                          |       | 771                              |       | 107       |       | 1,735      |       | (117           | )          | 1,618      |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Depreciation  and amortization charges     |       | 239                                          |       | 417                              |       | 16        |       | 672        |       | 206            |       | 878        |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Equity  method                             |       | —                                       |       | —                           |       | 222       |       | 222        |       | —         |       | 222        |       |
|                                       |       |                                         |       |                             |       |      |       |       |       |           |       |       |       |
| Additions to property, plant and equipment |       | 293                                          |       | 733                              |       | 24        |       | 1,050      |       | 70             |       | 1,120      |       |

 

F-64

----

Tableof Contents

 

**34. CONDENSED UNCONSOLIDATED FINANCIAL INFORMATION OF CEMIG**

 

**BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008 (UNCONSOLIDATED)**

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2009**         | ** ** | **2008** | ** ** |
| ASSETS                                            |       |             |       |   |   |
| CURRENT  ASSETS                                   |       |             |       |   |   |
| Cash  and cash equivalents                        |       | 657              |       | 257 |   |
| Tax  recoverable (note 8)                         |       | 8                |       | 12 |   |
| Deferred  income and social contr. Taxes (note 5) |       | 8                |       | 18 |   |
| Dividends  receivable                             |       | 1,362            |       | 1,437 |   |
| Other                                             |       | 14               |       | 21 |   |
|                                              |       |             |       |   |   |
|                                              |       | 2,049            |       | 1,745 |   |
|                                              |       |             |       |   |   |
| NONCURRENT  ASSETS                                |       |             |       |   |   |
| CRC  Account Securitization Fund (FIDC) (note 3)  |       | 873              |       | 811 |   |
| Deferred  income and social contr. Taxes (note 5) |       | 133              |       | 158 |   |
| Tax  recoverable (note 8)                         |       | 112              |       | 174 |   |
| Escrow  deposits                                  |       | 95               |       | 88 |   |
| Other                                             |       | 137              |       | 107 |   |
|                                              |       |             |       |   |   |
|                                              |       | 1,350            |       | 1,338 |   |
|                                              |       |             |       |   |   |
| PERMANENT  ASSETS                                 |       |             |       |   |   |
| Investments  in subsidiaries and affiliates       |       | 8,730            |       | 7,897 |   |
| Property,  plant and equipment                    |       | 31               |       | 5 |   |
|                                              |       |             |       |   |   |
|                                              |       | 8,761            |       | 7,902 |   |
|                                              |       |             |       |   |   |
| TOTAL  ASSETS                                     |       | 12,160           |       | 10,985 |   |

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2009**         | ** ** | **2008** | ** ** |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY       |       |             |       |   |   |
|                                             |       |             |       |   |   |
| CURRENT  LIABILITIES                             |       |             |       |   |   |
| Accounts  payable to suppliers                   |       | 14               |       | 7 |   |
| Payroll  and related charges                     |       | 18               |       | 16 |   |
| Taxes  payable                                   |       | 33               |       | 32 |   |
| Dividends  and interest on capital               |       | 954              |       | 960 |   |
| Current  portion of long-term financing          |       | 23               |       | 7 |   |
| Other                                            |       | 40               |       | 39 |   |
|                                             |       |             |       |   |   |
|                                             |       | 1,082            |       | 1,061 |   |
|                                             |       |             |       |   |   |
| LONG  TERM LIABILITIES                           |       |             |       |   |   |
| Long-term  financing (note 14)                   |       | 55               |       | 74 |   |
| Employee  post-retirement benefits (note 16)     |       | 110              |       | 90 |   |
| Accrued  liability for contingencies (note 17)   |       | 385              |       | 397 |   |
| Other                                            |       | 106              |       | 30 |   |
|                                             |       |             |       |   |   |
|                                             |       | 656              |       | 591 |   |
|                                             |       |             |       |   |   |
| SHAREHOLDERS’  EQUITY                       |       | 10,422           |       | 9,333 |   |
|                                             |       |             |       |   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY |       | 12,160           |       | 10,985 |   |

 

F-65

----

Table of Contents

 

**STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008(UNCONSOLIDATED)**

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------|------------|
| ** **                            | ** ** | **2009**         | ** ** | **2008** | ** ** |
|                                  |       |             |       |   |   |
| OPERATING  EXPENSES                   |       | (59              | )          | (127 | ) |
| OTHER  INCOME                         |       | 1,954            |       | 1,940 |   |
| FINANCIAL  INCOME (EXPENSES), NET     |       | 1                |       | 58 |   |
| INCOME  AND SOCIAL CONTRIBUTION TAXES |       | (128             | )          | (118 | ) |
|                                  |       |             |       |   |   |
| NET  INCOME                           |       | 1,768            |       | 1,753 |   |
|                                  |       |             |       |   |   |
| OTHER  COMPREHENSIVE INCOME           |       | 253              |       | 299 |   |
|                                  |       |             |       |   |   |
| COMPREHENSIVE  INCOME                 |       | 2,021            |       | 2,052 |   |

 

**STATEMENTSOF CASH FLOWS (UNCONSOLIDATED)**

**FORTHE YEARS ENDED DECEMBER 31, 2009 AND 2008**

 

**(Expressedin millions of Brazilian *reais*)**

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2009**         | ** ** | **2008** | ** ** |
|                                                  |       |             |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                 |       | 1,628            |       | 1,281 |   |
|                                                  |       |             |       |   |   |
|                                                  |       |             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                 |       |             |       |   |   |
| Escrow deposits                                       |       | (8               | )          | 5 |   |
| Acquisition of  investments                           |       | (290             | )          | (181 | ) |
|                                                  |       |             |       |   |   |
| Net cash used in  investing activities                |       | (298             | )          | (176 | ) |
|                                                  |       |             |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                |       |             |       |   |   |
| Dividends and interest  on capital paid               |       | (930             | )          | (870 | ) |
|                                                  |       |             |       |   |   |
| Net cash provided by  (used in) financing activities  |       | (930             | )          | (870 | ) |
|                                                  |       |             |       |   |   |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS |       | 400              |       | 235 |   |
|                                                  |       |             |       |   |   |
| CASH AND CASH  EQUIVALENTS:                           |       |             |       |   |   |
| Beginning of the year                                 |       | 257              |       | 22 |   |
| End of the year                                       |       | 657              |       | 257 |   |
|                                                  |       |             |       |   |   |
|                                                  |       | 400              |       | 235 |   |
|                                                  |       |             |       |   |   |
| SUPPLEMENTARY CASH  FLOWS DISCLOSURE:                 |       |             |       |   |   |
| Taxes paid - income  taxes                            |       | 40               |       | 84 |   |
| Interest paid, net of  interest capitalized           |       | 11               |       | 9 |   |

 

F-66

----

Table of Contents

 

Following is informationrelating to CEMIG unconsolidated condensed financial statements presentedabove:

 

·**                 **Investments —As of December 31, 2009 and 2008, investments in subsidiaries andaffiliates are comprised as follows (see note 9):

 
| ** **                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cemig Geração e Transmissão S.A.                      |       | 3,944    |       | 3,808    |       |
| Cemig  Distribuição S.A.                                   |       | 2,541    |       | 2,209    |       |
| Empresa Amazonense de Transmissão de Energia  S.A. – EATE  |       | 511      |       | 183      |       |
| Companhia de Gás de Minas Gerais – GASMIG                  |       | 431      |       | 320      |       |
| Light                                                                |       | 377      |       | —   |       |
| Cemig  Telecom                                                       |       | 271      |       | 259      |       |
| Empresa Norte de Transmissão de Energia S.A. –  ENTE       |       | 154      |       | 59       |       |
| Empresa Paraense de Transmissão de Energia  S.A. – ETEP    |       | 98       |       | 38       |       |
| Horizontes  Energia S.A.                                             |       | 67       |       | 67       |       |
| Rosal  Energia S.A.                                                  |       | 52       |       | 125      |       |
| Sá  Carvalho S.A.                                               |       | 45       |       | 95       |       |
| Empresa Regional de Transmissão de Energia  S.A. – ERTE    |       | 35       |       | 13       |       |
| Cemig  PCH S.A.                                                      |       | 33       |       | 52       |       |
| Usina Térmica Ipatinga S.A.                                     |       | 32       |       | 66       |       |
| Transchile Charrúa Transmisión S.A.                        |       | 28       |       | 34       |       |
| Empresa Catarinense de Transmissão de Energia  S.A. – ECTE |       | 22       |       | 10       |       |
| Companhia de Transmissão Centroeste de Minas                    |       | 17       |       | 7        |       |
| Cemig Capim Branco Energia S.A.                                      |       | 15       |       | 55       |       |
| Companhia Transleste de Transmissão –  Transleste          |       | 12       |       | 12       |       |
| Companhia Transudeste de Transmissão –  Transudeste        |       | 8        |       | 7        |       |
| Efficientia  S.A.                                                    |       | 7        |       | 6        |       |
| Central Térmica de Cogeração S.A.                     |       | 6        |       | 154      |       |
| Companhia Transirape de Transmissão –  Transirape          |       | 6        |       | 5        |       |
| UTE  Barreiro S.A.                                                   |       | 5        |       | 2        |       |
| Axxiom                                                               |       | 3        |       | 3        |       |
| Rio  Minas Energia                                                   |       | —   |       | 303      |       |
| Others                                                               |       | 10       |       | 5        |       |
|                                                                 |       |     |       |     |       |
|                                                                 |       | 8,730    |       | 7,897    |       |

 

F-67

----

Table of Contents

 

·**                 **Taxesrecoverable — As of December 31, 2009 and 2008, taxes recoverable are mainlycomprised as follows (see note 8):

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------|------------|
| ** **                 | ** ** | **2009**         | ** ** | **2008** | ** ** |
|                       |       |             |       |   |   |
| Current assets -           |       |             |       |   |   |
| VAT                        |       | 4                |       | 4 |   |
| COFINS                     |       | —           |       | 5 |   |
| PIS                        |       | —           |       | 1 |   |
| Other                      |       | 4                |       | 2 |   |
|                       |       |             |       |   |   |
|                       |       | 8                |       | 12 |   |
|                       |       |             |       |   |   |
| Other non-current assets - |       |             |       |   |   |
| Income tax                 |       | 100              |       | 163 |   |
| Social contribution tax    |       | 12               |       | 11 |   |
|                       |       |             |       |   |   |
|                       |       | 112              |       | 174 |   |

 

·**                 **Deferred income and social contribution taxes — As of December 31, 2009and 2008, the major components of the deferred income and social contributiontaxes are as follows (see note 5):

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **2009**         | ** ** | **2008** | ** ** |
|                                                          |       |             |       |   |   |
| Tax loss carryforwards                                        |       | 413              |       | 479 |   |
| Employee  post-retirement benefits                            |       | 24               |       | 15 |   |
| Provision for  contingencies                                  |       | 94               |       | 100 |   |
| Provision for doubtful  accounts                              |       | 16               |       | 18 |   |
| Other temporary  differences                                  |       | 2                |       | 1 |   |
|                                                          |       |             |       |   |   |
|                                                          |       | 549              |       | 613 |   |
| Provision for losses on  realization of deferred tax balances |       | (408             | )          | (437 | ) |
|                                                          |       |             |       |   |   |
|                                                          |       | 141              |       | 176 |   |
|                                                          |       |             |       |   |   |
| Current Assets                                                |       | 8                |       | 18 |   |
| Other Assets                                                  |       | 133              |       | 158 |   |

 

·**                 **Accrued liabilities for contingencies — As ofDecember 31, 2009 and 2008, accruedliabilities for contingencies are mainly comprised as follows (see note17):

 
| ** **                                | ** ** | **December  31,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2009**          | ** ** | **2008** | ** ** |
| **Labor Claims**                          |       |              |       |   |   |
| Various                                   |       | 73                |       | 75 |   |
|                                      |       |              |       |   |   |
| **Civil Lawsuits**                        |       |              |       |   |   |
| Personal  Injury                          |       | 20                |       | 28 |   |
| Rate  Increase                            |       | 55                |       | 76 |   |
| Other                                     |       | 89                |       | 94 |   |
|                                      |       |              |       |   |   |
|                                      |       | 164               |       | 198 |   |
| **Tax**                                   |       |              |       |   |   |
| FINSOCIAL                                 |       | 21                |       | 21 |   |
| Taxes  payable — Suspended Liability |       | 85                |       | 77 |   |
| INSS                                      |       | 1                 |       | 1 |   |
| Other                                     |       | 17                |       | 13 |   |
|                                      |       |              |       |   |   |
| ** **                                |       | 124               |       | 112 |   |
| **Regulatory**                            |       |              |       |   |   |
| ANEEL  Administrative Proceedings         |       | 24                |       | 12 |   |
|                                      |       |              |       |   |   |
| **Total**                                 |       | 385               |       | 397 |   |

 

F-68

----

Table of Contents

 

**35. SUBSEQUENT EVENTS**

 

**(a) Rates readjustment**

 

The rates of CemigDistribuição S.A. were increased by an average of 1.67% from April 8, 2010. Theadjustment was applied in different percentages by category of consumption. Theeffect of the rate adjustment (net amount of R36) was recorded into theconsolidated revenue of the year ended in 2009

 

**(b) Capital increase approved in the Annual General Meeting ofShareholders occurred on April 29, 2010**

 

Thecapital increase was approved in the Annual General Meeting of Shareholdersoccurred on April 29, 2010. The registered capital of CEMIG according to theBrazilian Corporate Law increased from R$3,102 to R$3,412, with issuance of newshares through capitalization of R$295 of the balance of the Retained EarningsReserve, and R$15 from the Capital Reserve, distributing to shareholders as aconsequence a 10% share bonus, in new shares of the same type as those held,with a nominal unit value of R$5.00.

 

**(c) Acquisition of additional stake in Light**

 

CEMIGsigned two Purchase and Sale Agreement with the Andrade Gutierrez ConcessõesS.A. (“AGC”) and FIP PCP (controlling company of Equatorial Energia S.A. - “Equatorial”),with the objective of restructuring the control of Light SA.

 

ForLight’s interest acquisition CEMIG will set up a Special Purpose Entity (“SPE”)together with FIP Fund (Investment Fund), where CEMIG will have a minorityinterest. This SPE will hold at the end of the restructuring 26.06% interest inLight SA. CEMIG will stay with its original interest of 13.03% directly in theLight.

 

Theclosing of the transaction is subject to approval by the competent regulatorybodies, by BNDES and all other approvals, financing agents and debentureholders of Light and its subsidiaries as necessary. The closing date of thetransaction will be determined after the fulfillment of these conditions.

 

*Agreement with AGC:*

 

Purchaseand Sale Agreement for acquisition of approximately 13.03% of the total shareand voting capital of Light. The total purchase price was R$785, equivalent toR$29.54 per common share, being the amount of R$753, representing 12.50% of thetotal capital of Light, paid on March 25, 2010 and R$32, representing 0.53% oftotal capital of Light, until June 27, 2010. These values will be corrected bythe rate CDI - Interbank Deposit Certificate and will be deducted fromdividends and interest on own capital may be paid or declared by the Light inthat period.

 

*Contract with the FIP PCP:*

 

Purchaseand Sale Agreement for acquisition of 7.22% from total share and voting capitalof Light. To conclude this transaction, Equatorial must pass through a processof split off to segregate the indirect assets of Light for a new company (“Newco”)to be incorporated and listed in the highest level of corporate governance ofBM&F Bovespa (“New Market”). Thus, Newco will hold the shares of Lightcurrently belonging to Equatorial. After this split off and the listing ofNewco’s shares on the New Market, the controlling group of Equatorial (FIP PCP)will dispose all of its direct and / or indirect interest in Newco to a companywhose capital CEMIG participate at not less than 20%. The purchase price wasthe same as that negotiated with the AGC, from R$ 29.54 per share of Light,which corresponds to R$435 for indirect currently held by FIP PCP in Light.

 

Thetransaction value may reach R$785, corresponding to the total value of commonshares issued by Light that Newco will indirectly hold, representingapproximately 13.03% of the total share and voting capital of the Light, if theminority shareholders of Newco exercising their right to sell under the sameconditions of the controlling (tag along).

 

TheReorganization of Equatorial should be completed within a maximum period of 18months and the amount to be paid will be fixed in time for the DI InterbankRate, from December 1, 2009trough the date of payment and will be deducted from the value the Dividendsand interest on capital which may be paid or declared by the Light in thisperiod.

 

F-69

----

Table of Contents

 

**(d) Additional option contract to buy indirect interest in Light**

 

OnMarch 24, 2010 CEMIG entered into an option contract for sale of shares andother matters (“the Option”) with Enlighted Partners Venture Capital LLC, alimited liability company registered in Delaware, USA. The object of thecontract is the grant of an option to sell the share units of Luce InvestmentFund (“Luce Fund”), with head office in Newark, DE, United States, which owns75% of the share units in Luce Brasil Fundo de Investimento em Participações,with headquarters in the City and State of Rio de Janeiro, which in turn is theindirect holder, through Luce Empreendimentos e Participações S.A., of26,576,149 common shares in Light, representing approximately 13.03% of thetotal and voting capital of Light.

 

Theprice of the share units of Luce Fund, in the event of the Option beingexercised, is US$340.5, plus interest equivalent to 11% per year from December1, 2009. From that amount will be deducted any dividends or Interest on Equitypaid or declared by Light as from December 1, 2009 up to the exercise of theOption, in case it happens. The price of the shares is equivalent to R$588 atthe exchange rate of December 1, 2009.

 

TheOption may be exercised at any time in the period from October 1 throughOctober 6, 2010 and its exercise shall create an obligation upon CEMIG toacquire or indicate a third party that shall acquire the totality of the shareunits of Luce Fund.

 

Finalclosing of this transaction is conditional upon certain contractuallyestablished requirements being met, and also approval by the ANEEL; theAdministrative Economic Defense Council, Cade; BNDES; and, where necessary, theother financing agents of and debenture holders of Light and its subsidiaries.

 

**(e) TAESA’s public offering**

 

OnMarch 23, 2010 the jointly-controlled subsidiary Alterosa (“the Offering Party”),published a Notice submitting to holders of shares and/or units issued byTAESA, a public offer for acquisition of the shares and units issued by theCompany (“the Offering”). The principal conditions were as follows: to acquirethe stockholding control of TAESA, the Offering Party paid the amount ofR$2,148 (R$37.14 per Unit and R$12.38 per Share - “the Acquisition Price”),which includes the deduction of the amounts of dividends that were paid byTAESA on October 26, 2009 (R$3.44 per Unit and R$1.15 per Share), and also themonetary updating of 103% of the Selic Rate from September 30, 2009 to November3, 2009, exclusive, as specified in the contract for purchase and sale ofshares in TAESA.

 

TheOffering Party intended to acquire the shares and the units from those to whomthe Offering was addressed for a price equivalent to 100% of the AcquisitionPrice (R$37.14 per unit and R$12.38 per share - “the Offer Price”).

 

TheOffer Price was to be paid at sight, in Brazilian currency, on the settlementdate, updated by the Selic rate calculated pro rata temporis from the ClosingDate, exclusive, up to the Settlement Date, inclusive. The IntermediaryInstitution had the duty of informing the Operations Director of the BM&FBovespa of the Offer Price by up to two days before the date of holding theAuction.

 

Stockholderswishing to accept the Offer were instructed to qualify by 6 pm on day prior tothe date of holding of the Auction, with Itaú Corretora or any other brokerauthorized to operate in the Bovespa segment of the BM&FBovespa (“Broker”),for such Broker to represent it in the Auction.

 

TheAuction of the Offer was held on May 6, 2010 (“the Auction Date”), at 1 pm,obeying the rules established by the BM&FBovespa (“the Auction”).

 

**(f) CEMIG Geração e Transmissão issued debentures and redeemedcommercial promissory notes of the third issue**

 

OnJanuary 15, 2010 Cemig Geração e Transmissão issued 270,000 debenturesnon-convertible into shares, which totalized R$2,700. The debentures weresubscribed on March 9 and March 10, 2010, and the funds obtained from theOffering were used to pay an early redemption of all the Commercial PromissoryNotes in circulation (“Total Early Redemption”), in accordance with item VI ofthe conditions stated on the Notes, under the heading “Early Redemption”.

 

OnMarch 10, 2010 (Redemption Date) the Company made the payment of the NominalUnit Value of the Notes, augmented by the remuneration specified in item 1 ofthe said conditions, under the heading “Remuneration”, calculated pro ratatemporis from the Issue Date (October 30, 2009) up to the said Redemption Date.The Company paid on March 10, 2010 the approximately amount of R$2,945 for thepromissory notes.

 

F-70

----

Tableof Contents

 

**(g) Notes from CEMIG Distribuição**

 

OnMay 27, 2010 CEMIG Distribuição raised around R$600 with Banco Brasil S.A. (“Bancodo Brasil) through two Cédulas de Crédito Comercial (Notes). which maturitydate is May 10, 2013 and the effective rate of interest is 11.43% per year.

 

Additionally,CEMIG Distribuição made a swap transaction with Banco do Brasil, in the sameamount of the notes, substituting the stated interest rate 11.47% for therating of 96% of CDI. The swap’s maturity date is May 27, 2010.

 

***************

 

F-71

----

Table of Contents

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                   |       | Corporate  by-laws of CEMIG, as amended and in effect since April 29, 2010.                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1                 |       | Second  Amended and Restated Deposit Agreement, dated as of August 10, 2001, by  and among us, Citibank, N.A., as depositary, and the holders and beneficial  owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference  to the Registration Statement on Form F-6 relating to the ADSs filed on  August 20, 2001 (File No. 333-13826)).                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.2                 |       | Shareholders’  Agreement, dated June 18, 1997, between the State Government and  Southern, relating to the rights and obligations of owners of our shares  (incorporated by reference to Exhibit 2.1 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.3                 |       | Amendment  No. 1 to the Second Amended and Restated Deposit Agreement, dated as of  August 10, 2001, by and among us, Citibank, N.A., as depositary, and the  holders and beneficial owners of ADSs evidenced by ADRs issued thereunder  (incorporated by reference to the Registration Statement on Form F-6  relating to the ADSs filed on June 11, 2007 (File No. 333-143636)). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.4                 |       | Deposit  Agreement, dated as of June 12, 2007, by and among us, Citibank, N.A.,  as depositary, and the holders and beneficial owners of ADSs evidenced by  ADRs issued thereunder (incorporated by reference to the Registration  Statement on Form F-6 relating to the common share ADSs filed on  May 7, 2007 (File No. 333-142654)).                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | Contract  of Concession for Generating Electric Energy, dated July 10, 1997,  between the Federal Government and us, relating to the provision of electric  energy generation services to the public (incorporated by reference to  Exhibit 4.1 to our Registration Statement on Form 20-F filed on  August 13, 2001 (File No. 1-15224)).                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2                 |       | Contract  of Concession of Electric Energy Transmission Services, dated July 10,  1997, between the Federal Government and us, relating to the transmission of  electric energy to the public (incorporated by reference to Exhibit 4.2  to our Registration Statement on Form 20-F filed on August 13, 2001  (File No. 1-15224)).                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3                 |       | Second  Amendment to the Electricity Transmission Concession Contract, dated  September 16, 2005 (incorporated by reference to Exhibit 4.3 to our  Registration Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4                 |       | Third  Amendment to the Electricity Transmission Concession Contract, for the  Northern, Southern, Eastern, and Western geographic areas, dated  April 13, 2010.                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5                 |       | Contracts  of Concession of Public Service for Distribution of Electric Energy, dated  July 10, 1997, between the Federal Government and us, relating to the  provision of electric energy distribution services to the public  (incorporated by reference to Exhibit 4.3 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6                 |       | First  Amendment to the Electricity Distribution Concession Contract, dated  March 31, 2005 (incorporated by reference to Exhibit 4.5 to our Registration  Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.7                 |       | Second  Amendment to the Electricity Distribution Concession Contract, dated  September 16, 2005 (incorporated by reference to Exhibit 4.6 to our  Registration Statement on Form 20-F filed on June 30, 2006 (File  No. 1-15224)).                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.8                 |       | 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)).                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.9                 |       | 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)).                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.10                |       | 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)).                                                             |

 

----

Table of Contents

 
| 4.11   |   | 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)).                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12   |   | Fourth  Amendment to the Contract for the Assignment of CRC Account, dated  January 23, 2006, between the State Government and us, relating to  amounts due to us from the State Government (incorporated by reference to  Exhibit 4.14 to our Registration Statement on Form 20-F filed on  June 30, 2006 (File No. 1-15224)).                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.13   |   | Announcement  of Start of Public Distribution of Senior Units under CRC Account  Securitization Fund, dated as of January 26, 2006 (incorporated by  reference to Exhibit 4.15 to our Registration Statement on  Form 20-F filed on June 30, 2006 (File No. 1-15224)).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.14   |   | Summary  of Indenture Covering Public Distribution of Non-Convertible Unsecured  Debentures, dated August 24, 2006, between Cemig Distribuição S.A. and Unibanco—União dos  Bancos Brasileiros S.A. (incorporated by reference to Exhibit 4.18 to  our Registration Statement on Form 20-F filed on July 23, 2007  (File No. 1-15224)).             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.15   |   | Summary  of Indenture Covering Public Distribution of Non-Convertible Unsecured  Debentures, dated April 17, 2007, between Cemig Geração e Transmissão S.A and  Unibanco—União dos Bancos Brasileiros S.A. (incorporated by reference to  Exhibit 4.19 to our Registration Statement on Form 20-F filed on  July 23, 2007 (File No. 1-15224)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.16   |   | Summary  of Indenture Covering the Second Issuance of Debentures, dated  December 19, 2007, between Cemig Distribuição S.A. and BB Banco de  Investimento S.A. (incorporated by reference to Exhibit 4.20 to our  Annual Report on Form 20-F filed on June 30, 2008 (File  No. 1-15224)).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.17   |   | Share  Purchase Agreement, dated April 23, 2009, between Cemig Geração and Transmissão S.A., Terna—Rete Elettrica  Nazionale S.p.A., and CEMIG (incorporated by reference to Exhibit 4.22  to our Registration Statement on Form 20-F filed on June 19, 2009  (File No. 1-15224)).                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.18   |   | English  Summary of Share Purchase Agreement between Companhia Energética de Minas  Gerais — CEMIG and Andrade Gutierrez Concessões S.A., dated December 30,  2009.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.19   |   | English  Summary of Share Purchase Agreement between Companhia Energética de Minas  Gerais — CEMIG and Fundo de Investimento em Participações PCP, dated  December 30, 2009.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.20   |   | English  Summary of Put Option Agreement between Companhia Energética de Minas Gerais  — CEMIG and Enlighted Partners Venture Capital LLC, dated March 24,  2010.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 8      |   | List  of Subsidiaries (incorporated by reference to Exhibit 8 to our Annual  Report on Form 20-F filed on May 25, 2005 (File No. 1-15224)).                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 11     |   | Code  of Ethics (incorporated by reference to Exhibit 11 to our Annual Report  on Form 20-F filed on July 1, 2004 (File No. 1-15224)).                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.1   |   | Chief  Executive Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, dated June 30, 2010.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.2   |   | Chief  Financial Officer, Investor Relations Officer and Control of Holding  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002, dated June 30, 2010.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.1   |   | Chief  Executive Officer Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, dated June 30, 2010.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.2   |   | Chief  Financial Officer, Investor Relations Officer and Control of Holding  Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002, dated June 30, 2010.                                                                                                                                                                                                    |

 

----