4. CONCESSIONS AND AUTHORIZATIONS

Cemig, through its subsidiaries, holds the following concessions or authorizations:

Company holding concession or
authorization

Concession or authorization
contract

Expiration
date

POWER GENERATION

Hydroelectric plants

Emborcação (1)

Cemig GT

07/1997

07/2025

Nova Ponte (1)

Cemig GT

07/1997

07/2025

Santa Luzia (1)

Cemig GT

07/1997

02/2026

Sá Carvalho (1)

Sá Carvalho

01/2004

12/2024

Rosal (1)

Rosal Energia

01/1997

05/2032

Machado Mineiro (1)

Salto Voltão (1)

Salto Paraopeba (1)

Salto do Passo Velho (1)

Horizontes Energia

Resolution 331/2002

07/2025

10/2030

PCH Pai Joaquim (1)

Cemig PCH

Authorizing Resolution
377/2005

04/2032

Irapé (1)

Cemig GT

14/2000

02/2035

Queimado (Consórcio) (1)

Cemig GT

06/1997

01/2033

Salto Morais (1)

Cemig GT

02/2013

07/2020

Rio de Pedras (1)

Cemig GT

02/2013

09/2024

Luiz Dias (1)

Cemig GT

02/2013

08/2025

Poço Fundo (1)

Cemig GT

02/2013

08/2025

São Bernardo (1)

Cemig GT

02/2013

08/2025

Xicão (1)

Cemig GT

02/2013

08/2025

Três Marias (2)

Cemig Geração Três Marias

08/2016

01/2046

Salto Grande (2)

Cemig Geração Salto Grande

09/2016

01/2046

Itutinga (2)

Cemig Geração Itutinga

10/2016

01/2046

Camargos (2)

Cemig Geração Camargos

11/2016

01/2046

Coronel Domiciano, Joasal, Marmelos, Paciência e Piau (2)

Cemig Geração Sul

12/2016 and 13/2016

01/2046

Dona Rita, Ervália, Neblina, Peti, Sinceridade e Tronqueiras (2)

Cemig Geração Leste

14/2016 and 15/2016

01/2046

Cajurú, Gafanhoto e Martins (2)

Cemig Geração Oeste

16/2016

01/2046

Thermal plants

Igarapé (1)

Cemig GT

07/1997

08/2024

Wind power plants

Central Geradora Eólica Praias de Parajuru (3)

Parajuru

Resolution 526/2002

09/2032

Central Geradora Eólica Volta do Rio (3)

Volta do Rio

Resolution 660/2001

01/2031

POWER TRANSMISSION

Rede Básica (4)

Cemig GT

006/1997

01/2043

Subestação – SE Itajubá (4)

Cemig GT

79/2000

10/2030

ENERGY DISTRIBUTION (5)

Cemig D

002/1997

003/1997

004/1997

005/1997

12/2045

GAS DISTRIBUTION (5)

Gasmig

State Law 11,021/1993

01/2053

DISCONTINUED OPERATIONS

Light SESA

Light

06/1996

06/2026

Light Energia

Light

06/1996

06/2026

PCH Lajes

Light

07/2014

05/2026

(1)	Generation concession contracts that are not within the scope of IFRIC 12, whose infrastructure assets are recorded as PP&E since the concession grantor does not have control over whom the service is provided to as the output is being sold mainly in the Free Market (‘ACL’).

(2)	Generation concession contracts within the scope of IFRIC 12, under which Cemig has the right to receive cash and therefore, recognizes a concession financial assets.

(3)

This refers to concessions, given by the process of authorization, for generation, as an independent power producer, of wind power, sold under the Proinfa program. The assets tied to the right of commercial operation are recorded in PP&E. The rights of authorization of commercial operation that are classified as an Intangible.

(4)	These refer to transmission concession contracts, for which a contract asset was recognized upon the application of IFRS 15 effective from January 1, 2018. See Note 2.4.

(5)	Concession contracts that are within the scope of IFRIC 12 and under which the concession infrastructure assets are recorded under the intangible and financial assets bifurcation model, and in compliance with IFRS 15, the infrastructure under construction has been classified as a contract asset.

Generation concessions

In the generation business, the Company sells energy:

(1)	Through auctions, to distributors to meet the demands of their captive markets; and

(2)	To free customers in the free market (Ambiente de Contratação Livre, or ACL).

In the free market, energy is traded by the generation concession holders, small hydro plants (PCHs, or SHPs), self-producers, traders, and importers of energy.

Transmission concessions

Under the transmission concession contracts, the Company, through its subsidiaries, is authorized to charge a Tariff for use of the Transmission System (Tarifa de Uso do Sistema de Transmissão, or TUST). Tariffs are adjusted annually on the same date the Permitted Annual Revenue (Receitas Anuais Permitidas, or RAP) of transmission concessions contracts is adjusted. This tariff is in effect from July 1 of each year, upon its publication, until June 30 of the subsequent year.

The payment for use of transmission service also applies to generation provided by the Itaipu Binacional. However, due to the legal characteristics of that plant, the corresponding charges are assumed by the holders of distribution concessions that hold quotas of its output.

Onerous concessions

When obtaining the concessions for construction of certain generation projects, the Company is required to make payments to the regulator over the period of the contract or for up to 5 years upon signature of the concession contract for plants with installed capacity between 1 and 50 MW, as compensation for the right to operate them. The information on the concessions and the amounts to be paid are as follows:

Project

Nominal value in
2018

Present value in
2018

Period of the concession

Updating indexer

Irapé

32,964

14,707

03/2006 – 02/2035

IGPM

Queimado (Consortium)

8,229

4,027

01/2004 – 12/2032

IGPM

Salto Morais Small Hydro Plant

—

06/2013 – 07/2020

IPCA

Rio de Pedras Small Hydro Plant

—

06/2013 – 09/2024

IPCA

Various Small Hydro Plants (*)

—

06/2013 – 08/2025

IPCA

(*)	Various SHPs, with installed capacity less than 50 MW: Luiz Dias, Poço Fundo, São Bernardo and Xicão.

The concessions fee are paid monthly to the grantor for an amount that changes over time. These payments are recorded as an intangible asset, representing a right to operate the concession and to charge users through the concession period, they are recorded as from the date of signature of the contracts at the present value of the future payment obligations.

The amounts paid to the grantor in 2018, the nominal value and the present value of the amounts to be paid in the next 12 months, are as follows:


Project	Interest, %		Amounts paid in 2018		Nominal value of amounts to be paid in the next 12 months		Present value of amounts to be paid in the next 12 months
Irapé		100.00		1,762		2,019		1,902
Queimado (Consortium)		82.50		501		588		554
Salto Morais Small Hydro Plant		100.00		12		—		—
Rio de Pedras Small Hydro Plant		100.00		35		—		—
Various Small Hydro Plants		100.00		171		—		—

The rate used by the Company to discount the above liabilities to its present value, was 12.50%, and represents the average cost of funding in normal conditions on the date the concession contract was entered into.

Distribution concessions

The Company operates the concession for the distribution of electricity in the greater part of the State of Minas Gerais, which expires in December 2045.

According to the concession contract, all assets and facilities that are used in the provision of the distribution service and which have been constructed by the concession holder are considered part of the assets of the related concession and must be returned to the grantor at the end of the contract. Cemig is entitled to receive a payment for the residual value of the infrastructure assets at the end of the concession contract taking into consideration the amounts involved and the timing when they became part of the infrastructure.

The Company is not subject to make any payments to the grantor in order to operate the distribution concessions, but is required to comply with certain quality standards and make infrastructure investments.

The concession contracts and the Brazilian legislation establish a mechanism of maximum prices that allows for three types of adjustments to tariffs: (i) an annual tariff adjustment; (ii) periodic review of tariffs; and (iii) extraordinary reviews.

Each year the Company has the right to request for the annual adjustment, the purpose of which is to be compensated the effects of inflation on the tariffs, and to allow for certain changes in costs that are outside the Company’s control to be passed through to customers – for example the cost of electricity purchased for resale and sector charges including charges for the use of the transmission and distribution facilities.

Also, the regulator performs a Periodic Review of tariffs every five years, which aims to make adjustments due to changes in the Company’s costs, and to establish a factor based on scale gains, which will be applied in the annual tariff adjustments, for the purpose of sharing such gains with the Company’s customers.

The Company also has the right to request an extraordinary review of tariffs, in the event that any unforeseen development significantly affects the economic-financial equilibrium of the concession. The Periodic Review and the Extraordinary Review are subject, to a certain degree, to the discretion of the regulator, although there are pre-established provisions for each revision cycle. When the Company requests an annual tariff adjustment, it is required to prove the financial impact on operations resulting from these events.

Under the distribution concession contracts, the Company is authorized to charge customers a tariff consisting of two components: (i) A component related to costs of energy purchased for resale, charges for use of the transmission grid and charges for use of the distribution system that are not under its control (‘Parcel A costs’); and (ii) a portion relating to operating costs (‘Parcel B costs’).

Renewal of the distribution concession

On December 21, 2015, the Company signed, with the Mining and Energy Ministry, the Fifth Amendment to its concession contracts, extending its energy distribution concessions for an additional 30 years, starting January 1, 2016.

The principal characteristics and terms of the Amendment are as follows:

•

The annual tariff adjustment will occur on May 28 of each year, starting in 2016; with the adjustment provisions specified in the previous concession contract remained unchanged. For the subsequent tariff adjustments the rules set for in Clause 6 of the Amendment will be applied.

•

Limitation of in the distribution of dividends and/or payment of Interest on Equity to the minimum established by law, in the envent of non-compliance with the annual indicators for outages (DECi and FECi) for two consecutive years, or three times in a period of five years, until the regulatory parameters are restored.

•

There is a requirement for injections of capital from the controlling shareholder in an amount sufficient to meet the minimum conditions for economic and financial sustainability.

•

Subject to the compliance of efficiency criteria related to continuity of supply and the economic and financial management to guarantee the concession’s operations as follows: (i) for five years starting January 1, 2016, any non-compliance for two consecutive years, or non-compliance with any of the conditions at the end of five years, will result in cancelation of the concession contract; (ii) starting January 1, 2021, any non-compliance for three consecutive years with the criteria of efficiency in continuity of supply, or for two consecutive years with the criteria of efficiency in economic and financial management, will result in proceedings to establish expiration of the concession.

The criteria of efficiency in economic and financial management are as follows:

•

Operational cash generation (–) QRR¹ (–) interest on the debt² ³ 0;

•

Ebitda ³ ³ 0 (by the end of 2017, maintained in 2018, 2019 and 2020);

•

[Ebitda (–) QRR] ³ 0 (by the end of 2018, maintained in 2019 and 2020);

•

{Net debt⁴ / [Ebitda (–) QRR]} £ 1 / (80% of the Selic rate) (by the end of 2019); and,

•

{Net debt / [Ebitda (–) QRR]} £ 1 / (111% of the Selic rate) (by the end of 2020).

1.	QRR = ‘Regulatory reintegration quota’, or Regulatory depreciation expense.

2.	Net debt x 111% of the Selic rate.

3.	Calculated according to the method defined by the regulator (Aneel), contained in distribution concession contract.

4.	Gross debt, less financial assets.

The Company was in compliance with the above criteria as of December 31, 2018.

Gas distribution concessions

The concessions for distribution of natural gas are granted by each Brazilian state. In the state of Minas Gerais the tariffs for natural gas are set by the regulator, the State’s Economic Development Secretariat, by market segment. The tariffs is comprised of a portion for the cost of gas and a portion for the distribution of gas. Each quarter the tariffs are adjusted to pass through the cost of gas, and once a year they are adjusted to update the portion allocated to cover the costs relating to the provision of the distribution service – remuneration of invested capital and to cover all the operating, commercial and administrative expenses of the concession holder.

In addition to these adjustments, in April 2015 the Economic Development Secretariat sent to the subsidiary Gasmig and Official Letter, SEDE/GAB/Nº303/2014 stating the timetable set for the first Tariff Review cycle. Due to delays, the methodology of the first Tariff Review cycle was decided in July 2017, and the homologation of the tariff for this tariff cycle is expected to occur in 2019. These reviews occur every five years, from the end of the first cycle, to evaluate the changes in the costs of the Gasmig, and to adapt the tariffs. The concession contract also specifies the possibility of an extraordinary review of tariffs if any event occurs that puts the economic-financial balance of the concession at risk.

On December 14, 2018, the Minas Gerais State Department for Economic, Scientific, Technological and Higher Education Development (‘Sedectes’) or (‘the grantor power’) presented a study, prepared by Fundação Getulio Vargas Business school (“FGV”), related to financial economic rebalancing of the Gasmig concession agreement, also supported by consultation from General Attorney’s Office of the State. The rebalancing that has been requested by the grantor is based on the contractual obligation to build a gas pipeline to serve the Nitrogen Fertilizers Unit (UFN), which should have been built by Petrobras. As a result Company was requested to paid the State of Minas Gerais the amount of R$852 million. Based on the study, Sedectes requested a response from Gasmig and began discussion for solution related to imbalance referred to, considering that one of its conditions for extension of the concession contract (from 2023 to 2053, as specified in the second amendment to the contract) was the requirement to make investments for the construction of the gas pipeline.

In this context, Gasmig hired specialized consultants to prepare an independent financial-economic valuation and legal opinion, to establish the fair value of the consideration to be paid to the Minas Gerais State, for the purpose of enabling the rebalancing of the concession. The Company is accompanying the development of these discussions with the grantor authority.

The payment of the concession grant fee, when made, will be considered a concession intangible asset.

No changes in the accounting treatment of the concession contract, considering its extension, was made as a result of these events in the financial statements of the Company for the year ended December, 31, 2018.