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Challenges of a new time

Challenges of a new time. Agenda. New State administration The CRC affair CVM and SEC The new Federal Administration Energy auctions The rate review process Earning preview. Disclaimer.

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Challenges of a new time

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  1. Challenges of a new time

  2. Agenda • New State administration • The CRC affair • CVM and SEC • The new Federal Administration • Energy auctions • The rate review process • Earning preview

  3. Disclaimer Certain statements contained in this presentation are “Forward-Looking Statements” within the meaning of the US Securities Laws, and are thus prospective and subject to risks and uncertainties. “Forward-Looking Statements” are matters that are not historical facts and are beyond our control. For a discussion of risks and uncertainties as they relate to us, please refer to our 2000 Form 20F, and in particular Item 3 under “Key information - Risk Factors”.

  4. The new governor is a young congressman who is the House of Representatives Speaker • New State administration • The new governor is Mr. Aécio Neves • A first round win, with 57% of total votes • Congressman • A large and comfortable majority at the local Legislature • Major proposals • Create Cemig holding company • Expand generating capacity • Energy trading • Expand the transmission and distribution systems aiming at improving service quality • Expand natural gas supply • 100% penetration in rural areas • Develop and consolidate an excellence center on energy • No plans to privatize Cemig

  5. The new Administration will appoint new members of Board • The Board of Directors • 11 members • 7 appointed by MG • 4 appointed by SEB • The Auditing Committee* • 5 members • 3 appointed by MG • 1 appointed by SEB • 1 appointed by PN holders • Decisions are made on a 50% majority basis * Organized under Brazilian legislation

  6. Professional team is expected to be appointed The executive officers mostly are career employees or retired employees who are able to respond the challenge of a competitive industry.

  7. Final decision will come at the long run * SEB : the legal proceeding • Case Update • Still in the State Appeal Courts, pending on appeal filed last year • Next step: Federal Appeal Court • What changes with the new State Administration • Nothing : the legal proceeding must be finally ruled by the Courts • There is no perspective of an earlier agreement * SEB : AES, Mirant and Opportunity Fund joint venture

  8. Negotiations with government to settle the industry agreement • The CRC affair • Negotiations with the Federal Government • Total amount : R$ 1.1 billion • Discount rate : 12% • Use of proceeds: • Expenses derived from the rationing related agreement • Debt of any sort • Negotiation with the State of Minas Gerais • R$ 510 million • Tenor : 12 years • Interest rate : 12% p.a. • Guarantees: dividends

  9. Cemig is taking the proper measures to resolve the CRC case • CVM and SEC • ANIMEC • The Brazilian Association of minority shareholders notified CVM, complaining about the lack of action of the executive officers on the CRC case. Therefore, those officers should be sued. • The CVM , after the company’s defense be accepted, ruled on the company’s officer favor saying the management had taken proper measures to collect the CRC receivables. • CRC bad debt accrual • CVM notified Cemig on CRC overdue payment determining a bad debt accrual for those payments and the re-filing of the second quarter ITR . • Cemig filed a administrative appeal aiming at the suspension of the required measure. • Minority shareholder appointed Director letter to CVM • The SEB appointed Directors filed a complaint against the State appointed Directors alleging inaction or omission on the CRC case. The company is preparing a defense letter. • 20 F • With the closing of the CRC negotiation, the 20F filing will be resumed

  10. The PT’s view on the electricity industry • The new Federal Administration • There is no official statement on the industry yet: • Change on the approach : market oriented regulation may be discarded. • Deep concern on prices may result in attempt to establish price control. • Deeper changes may require Congressional approval. • The team responsible for the industry restructuring is not appointed yet: • The policymakers who made the PT’s campaign proposal are likely to take responsibility: • The key person is Luiz Pinguelli Rosa

  11. “ It is necessary to unravel the big confusion the industry is.” • Luiz Pinguelli Rosa PT energy industry policymaker The insights to follow were selected from an interview granted to an energy specific electronic newspaper

  12. The approach will be changed • Change the approach so that it is focused on public service rather than privatization and liberalization; • Notwithstanding, previously signed contracts will be honored; • Electricity system expansion planning will be centralized and will be conducted by the existing energy planning committee, the CNPE ; • The responsibility to handle growing demand is that of the Federal Government ; • The private investor role is supplementary;

  13. Deep concern with the capacity expansion • Assure the capacity expansion through state owned and private generators: • The needed investment is approximately R$ 10 billion per year of which R$ 5 billion will be invested by the Eletrobras group; • The state owned utilities are under-leveraged and there may raise funds in the capital markets; • The restrictions on state owned companies’ ability to raise funds will be lifted. • The MAE, the wholesale energy market, will have a complementary role: • The generators will be committed to the capacity expansion; • The ROI will be set through transmission fixed revenue like approach; • It will be assured inflation based adjustments ;

  14. Concerns on price levels • The electricity price must be affordable for the consumers: • Change the way the concessions are granted • The idea is to have lowest rate bid win rather than the highest licensed fee; • The rate review process will be revised to change the inflation adjustment index, the IGP-M, which reflects the impact of the depreciated real; • Extend initial contracts through negotiation among the various parties; • nevertheless, the utilities must be profitable but not excessively so; • The negotiation process will not be extensive with the Government in the role of arbitrator;

  15. Other points to watch • The ANEEL will have an industry oversight role assuring regulation enforcement; • The rationing loss recovery mechanism will be preserved and other points will be revised : • Energy supply insurance; • The CBEE ( Government owned trader) role; • Thermal generation projects will have a supplementary role to the hydro-generation and a progressive growth in the country’s energy matrix. Points to be revised are: • Natural gas high price ( dollar denominated contracts); • Take or pay contracts; • The use of alternate energy sources is one of the highest priorities of the PT’s energy industry strategy;

  16. Low demand turned prices low • Energy auctions What went wrong? • Disappointing demand. • Low asked prices for energy to deliver in the SE and MW region. • Buyers unsure on price trend. • Overcapacity on the short term • Uncertainty on the regulatory framework

  17. Federal auction final results

  18. Electricity price linked to capacity expansion cost The 2002-2005 pricing outlook • The VN, R$ 85 per MWh, is the price reference • Marginal cost is around VN • For the long run, price will range from R$ 70 to 85 per MWh • Good rainfalls may affect spot market price keeping it down for the short term • Subsidies on the natural gas price will turn thermal projects competitive

  19. Still pending decision on the methodology to be used • The rate review process • The rate base asset value to be calculated by a replacement price approach. • CNPE’s request on the criteria taken by the ANEEL. • Cemig’s process supposed to be completed until April 2003 • Subject to public hearings

  20. Year of volatility • Earning preview Major highlights • Devaluation of the Br R$ was very sharp : 30% in the quarter, 40% year to September. • Sale volume growth is still sluggish because of the weak economic activity and rationing impact . • Subsidies granted to the low income consumers.

  21. Energy Retail Sale Volume Growth Analysis • Estimated retail sales in 2002 are: • Match 1998 and 1999 • 4.7% lower than 2000 • 2.3% higher than 2001 See disclaimer slide 2

  22. Energy Retail Sale VolumeGrowth Analysis • 3Q 02 retail sale volume is: • 4.8% lower than 2000 • 16.8% stronger than 2001

  23. Energy Retail Sale VolumeGrowth Analysis • In the 2 and 3Q 02, the monthly average retail sales volume was 10% higher than 1Q 02

  24. Energy Retail Sales VolumeGrowth Analysis • September 2002 retail sales were: • Approximately 16% stronger compared to September 2001 • 4% lower than 2000

  25. Energy Retail Sales VolumeGrowth Analysis • 2002 energy retail sale estimate is still higher than the 2001 energy retail sales • Nonetheless, 2002 estimates match 1998 and 1999 retail sales • The impact of 2001/2002 rationing will persist for at least 3 years • 2000 retail sale level will be matched only in 2005

  26. Retail Sales Volume Growth Estimate Reflects Impact of 2001-2002 Rationing • For the 2003-2005 period the estimated annual growth rate is 2.2% • 2000-2004 CAGR is 0.4% See disclaimer slide 2

  27. Energy Retail Sales VolumeGrowth Analysis • The major reasons for slower growth are: • Change in average residential and commercial consumption: • 1st half 2002 averages are 16% and 13% lower than 2001; • Change in industrial consumption pattern: • Some consumers are replacing utility supply by self-generation (hydropower projects at aluminum industry, cogeneration projects at steel and fertilizer plants) and diesel fired generators or other alternatives during peak hours.

  28. Therefore, we are revising our estimate for 2002 • New requirements for low income consumer subsidy brought a R$5 million monthly revenue loss. • Reduction of the initial contract volume rose from 2.4% to 6.3%, resulting in a lower revenue loss recovery. • Consumption growth estimate now is 2.3% down from 4%, previously predicted.

  29. CAPEX R$3.4 Billion Planned for the Next 4 Years Economic Basis Values in million of reais All financial information in Brazilian GAAP

  30. Major Projects Funil Queimado Porto Estrela Aimorés All financial information in Brazilian GAAP

  31. Committed to the best Corporate Governance practices Best Electricity Industry Corporate Governance Practices in Latim America • BOVESPA Level I : CMIG3 and CMIG4 • NYSE Level II ADR: CIG • Latibex : XCMIG • Dow Jones Sustainability Index 2000, 2001 and 2002

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