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Rating Action:

MOODY'S AMERICA LATINA UPGRADES CEMIG'S BRAZIL NATIONAL SCALE RATING TO Baa2.br; CHANGES OUTLOOK TO STABLE

 The document has been translated in other languages

04 Jun 2004
MOODY'S AMERICA LATINA UPGRADES CEMIG'S BRAZIL NATIONAL SCALE RATING TO Baa2.br; CHANGES OUTLOOK TO STABLE

Approximately R$ 1.025 billion of Debt Securities Affected.

Sao Paulo, June 04, 2004 -- Moody's America Latina Ltda. upgraded its Brazil National Scale ratings of Companhia Energetica de Minas Gerais ("Cemig") to Baa2.br and affirmed its Global Local Currency Scale ratings at B1. The rating outlook was changed to stable from negative.

The affected ratings are:

- Brazil National Scale ratings: Issuer and senior unsecured debenture ratings upgraded to Baa2.br from Baa3.br;

- Global Local Currency Scale ratings: Issuer and senior unsecured debenture ratings affirmed at B1.

Moody's America Latina also assigned a Baa2.br Brazil National Scale rating and a B1 Global Local Currency Scale rating to Cemig's new R$ 400 million senior unsecured debenture issuance due 2014.

The National Scale Rating upgrade and the change in outlook reflect notable improvement in Cemig's financial performance since year-end 2002, which is expected to continue to strengthen due to the impact of the company's 19.13% average tariff increase in April 2004. Adjusted total debt (adjusted for post-retirement obligations) to EBITDA improved to 2.6x for the 12 month period ending March 31, 2004 compared to 4.9x as of December 31, 2002. Gross cash flow interest expense coverage increased to 3.6x as of March 31, 2003, compared to 2.5x in 2002. The upgrade and change in outlook additionally incorporate the passage of a detailed long term strategic plan by Cemig's board of directors, which has the majority of its members appointed by the state of Minas Gerais (rated B3 by Moody's Investors Service).

Cemig's ratings reflect its position as a leading vertically integrated electric utility in Brazil and one of the largest energy distributors in Latin America. The ratings are additionally supported by the company's long term concession, covering 96% of the state of Minas Gerais, the third largest market in Brazil, after São Paulo and Rio de Janeiro; its moderate leverage and improving debt profile; and the utility's above average disclosure for Brazilian issuers, as demonstrated by quarterly publication of a cash flow statement. However, Cemig's ratings also consider the B3 rating of the state of Minas Gerais, the company's controlling shareholder, which reflects the state's heavy, growing debt burden and a structural fiscal imbalance. Moody's America Latina observes that there is no clear ring-fencing of Cemig's cash flows from its controlling shareholder, thus leaving the company exposed to the risk of a cash drain in a scenario under which the state experiences a serious fiscal crisis. Cemig's ratings also consider uncertainties related to the evolving regulatory environment for Brazil's electricity sector, its exposure to devaluation risk, with approximately R$ 800 million in un-hedged foreign currency denominated debt and refinancing risk associated with the company's R$ 1.6 billion short term debt position as of March 31, 2004.

The stable outlook incorporates the expected stabilization in Cemig's leverage at its current level, with an improving amortization profile. The stable outlook also reflects Moody's America Latina's view that, given the current rating of the state of Minas Gerais of B3 and the lack of ring-fencing mechanisms to mitigate the risk of the state's ability to drain cash from the utility, further rating upgrades are unlikely, absent improving credit quality of the state of Minas Gerais or additional evidence demonstrating the financial independence of the utility from its controlling shareholder. A downgrade of the state's rating, continued increased leverage or an adverse regulatory environment are the most likely events that could lead to a lowering of Cemig's ratings or its outlook. Additionally, the planned spin-off of Cemig's distribution, generation/transmission and other operating companies and likely future status of the current issuer as a holding company would likely create structural subordination resulting in a lower rating for any debt remaining at the holding company level.

In the 12-month period ending March 31, 2004, Cemig posted gross cash flow of R$ 1.2 billion and retained cash flow of R$ 1.0 billion, with adjusted total debt of R$ 5.5 billion (adjusted for R$ 1.66 billion in post retirement obligations), with adjusted total debt to EBITDA of 2.6x and EBITDA to gross interest expense of 4.6x. Free cash flow has been negative since 2001, with a free cash flow deficit of R$289 million for the twelve months ending March 31, 2004, R$ 414 million in 2003 and R$ 284 million in 2002, thus resulting in increasing indebtedness. Of the company's total balance sheet debt outstanding of R$ 3.8 billion, approximately 42% is foreign currency denominated, but devaluation risk exposure is limited to 26% of total debt by US$ to CDI interest rate swaps.

Based in Belo Horizonte, in the Brazilian state of Minas Gerais, Cemig distributes electricity to more than 5.8 million consumers and generated 27,025 MWh of energy in 2003, with net revenues of R$ 5.6 billion.

Sao Paulo
Alexander I. Carpenter
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3443-7444

New York
Chee Mee Hu
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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