Approximately BRL3.3 billion of debt instruments affected
Sao Paulo, February 04, 2011 -- Moody's América Latina (Moody's) affirmed its Baa3 global scale
and Aa1.br Brazil national scale ratings for CEMIG GERAÇÃO
E TRANSMISSÃO S.A. (CEMIG GT) and CEMIG DISTRIBUIÇÃO
S.A (CEMIG D). At the same time, Moody's affirmed
the Ba1 global scale and Aa2.br on the Brazil national scale issuer
ratings of the holding company Companhia Energética de Minas Gerais
(CEMIG). Moody's has changed the outlook for all ratings
The rating action affected the following debt issues:
- BRL 238.8 million due 2011 guaranteed by CEMIG -
- BRL 1,566 million due 2012 guaranteed by CEMIG -
- BRL 1,134 million due 2015 guaranteed by CEMIG -
- BRL 250.5 million due 2014 guaranteed by CEMIG Baa3/ Aa1.br
The Baa3 issuer ratings of CEMIG GT and CEMIG D reflect the overall investment
grade profile of CEMIG and its subsidiaries on a consolidated basis,
as together they have adequate credit metrics for the rating category,
a strong presence in the Brazilian electricity industry, experienced
management, recognized competitiveness and above average corporate
CEMIG's rather ambitious expansion plan via acquisitions and equity
investments, the evolving Brazilian regulatory framework,
and a relatively high distribution pay-out ratio constrain the
ratings as do the risks associated with the potential political interference
of the Government of the State of Minas Gerais with CEMIG's business strategy.
Moody's changing the outlook to stable from negative reflects CEMIG's
proven ability to secure timely and relatively adequate funding to finance
its capital expenditures and acquisition expansion program over the past
fifteen months while posting credit metrics that are still reasonably
in line with the Baa3 rating category.
The acquisition of TRANSMISSORA ALIANÇA DE ENERGIA ELETRICA S.A
(TAESA) (Baa3;stable) and more recent increased equity investment
in LIGHT S.A (LIGHT) (Ba1;stable) stand out as two major examples
of CEMIG's ambitious strategy to become one of the leading players
in the Brazilian electricity industry.
In line with Moody's expectations, CEMIG has presented weaker
credit metrics on a consolidated basis since the end of 2009 when it first
announced the acquisition of TAESA. Given the sizable amount of
around BRL 5 billion involved in this acquisition, CEMIG's
credit metrics immediately reflected higher leverage ratios. In
addition the acquisition severely impacted the company's liquidity
position as the bulk of the funding for the acquisition was initially
financed with short-term debt.
Notwithstanding the higher leverage and diminished liquidity, CEMIG
once again demonstrated that it has resilient access to the local capital
markets as it took out the short-term debt with a BRL 2.7
billion long-term debentures issuance in the local market at the
beginning of 2010 coupled with the execution of a shareholding agreement
with a group of institutional investors to partially help to finance the
CEMIG's management has stated its intention to replicate the TAESA
acquisition structure with any additional equity investments in or the
acquisition of LIGHT. The advantages of this business and financial
strategy is that it obtains relatively long-term funding,
share the control of the company through a shareholding agreement while
at the same time, by CEMIG remaining as a minority shareholder,
it maintains the acquired companies as private capital- held entities.
This is particularly important because as private companies they are not
subject to any government budget or borrowing limits and are exempt from
requiring approval to obtain new funding and can access a broader range
of funding alternatives.
CEMIG is expected to sign a shareholding agreement with a group of financial
institutions, which will constitute an equity fund and together
with CEMIG acquire around 26% of the capital of LIGHT from two
major shareholders that are leaving the controlling group of the latter.
This consortium is expected to contribute up to BRL 1.6 billion
while CEMIG's participation would be around BRL 400 million.
This shareholding agreement entails CEMIG of being financially obliged
to buy back the participation of these investors after five years at the
discretion of the latter. Unlike the agreement signed with the
investors of TAESA, which largely consisted of pension funds,
the current shareholders will, most likely, exercise their
right to sell back their participation to CEMIG at the end of five years.
This agreement will determine minimum cumulative dividends from LIGHT
to assure the investors, in case they exercise their right to sell
back the shares to CEMIG after five years, a remuneration to be
agreed on by the parties.
Moody's notes that to be conservative it treats the purchase obligations
stemming from these shareholding agreements as off-balance sheet
debt for the purpose of running its own projections and applying its rating
methodology. Moody's has also carried out further adjustments
to reflect the potential full consolidation of TAESA and LIGHT,
which indicate that CEMIG will still post credit metrics in line with
the Baa3 rating but at the lower end of this rating category and leaving
less cushion to absorb any unanticipated events. These projections
are conservative in that Moody's forecasts further acquisitions
within the medium horizon in line with what management has consistently
stated; however, the size of these acquisitions along with
the funding arrangements will dictate future rating actions.
The stable outlook reflects Moody's expectations that CEMIG will
prudently manage its capital expenditures and acquisition program to maintain
its credit metrics and preserve its current liquidity position which is
more compatible with the Baa3 rating category than prior to the TAESA
transaction a year ago.
Given CEMIG's ambitious capital expenditures and acquisition program
the likelihood of a rating upgrade in the medium-term is very limited.
Quantitatively, Moody's could consider a rating upgrade if
Retained cash flow to total debt rose above 20% and interest coverage
became higher than 4.5x on a sustainable basis.
The ratings could be downgraded if CEMIG continues to make acquisitions
but fails to preserve its current liquidity profile and capital structure
without material ongoing near-term debt maturities. The
ratings could also be downgraded if retained cash flow to total debt falls
below 11% or interest coverage declines to below 3.0x for
an extended period.
In accordance with Moody's methodology for government related issuers,
or GRIs, the Baa3 corporate family rating of CEMIG reflects the
combination of the following inputs:
- Baseline credit assessment (BCA) of 10 (mapping to a Baa3)
- High-level dependence (70%)
- Moderate level of government support (31-50%)
- The Ba1 rating of the State of Minas Gerais, which has
a stable outlook.
CEMIG is a GRI as defined in Moody's rating methodology "The Application
of Joint Default Analysis to Government Related Issuers". Moody's
methodology for GRIs is to systematically incorporate into the rating
both the stand-alone credit risk profile or Baseline Credit Assessment
(BCA) of the company as well as an assessment of the likelihood that its
government owner would provide extraordinary support to the company's
obligations. The BCA of a GRI is expressed on a 1-21 scale
or as a range within the 1-21 scale, according to the issuer's
preference, where one represents the equivalent risk of an Aaa,
two a Aa1, three a Aa2 and so forth. Please refer to Moody's
special comments "Rating Government-Related Issuers in Americas
Corporate Finance" and "Government-Related Issuers: July
2006 Update" at moodys.com for additional information on GRIs.
The Aa1.br national scale rating reflects the standing of the company's
operating subsidiaries' credit quality relative to their domestic
peers. Moody's National Scale Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issuances and issuers within a
country, enabling market participants to better differentiate relative
risks. NSRs in Brazil are designated by the ".br" suffix.
Issuers or issues rated Aa1.br demonstrate very strong creditworthiness
relative to other domestic issuers. NSRs differ from global scale
ratings in that they are not globally comparable to the full universe
of Moody's rated entities, but only with other rated entities within
the same country.
The last rating action for CEMIG was on January 12, 2010 when Moody's
affirmed its Baa3 global scale and Aa1.br Brazil national scale
issuer ratings to Cemig Geração e Transmissão S.A
("CEMIG GT"). At the same time, Moody's assigned a Baa3 rating
on the global scale and Aa1.br rating on the Brazilian national
scale to BRL 2.7 billion local unsecured debentures issued by CEMIG
The principal methodology used in rating CEMIG was the Regulated Electric
and Gas Utilities Rating Methodology (August 2009).
Headquartered in Belo Horizonte, state of Minas Gerais, Companhia
Energética de Minas Gerais - CEMIG - is a public
holding company with interests in the generation, transmission and
distribution of electricity. The government of the state of Minas
Gerais holds 51% of its voting capital and 22% of its total
capital. CEMIG Geração e Transmissão S.A.
(CEMIG GT) and CEMIG Distribuição S.A. (CEMIG
D), are CEMIG's two main subsidiaries responsible for around 86%
of consolidated Net Sales and 80% of consolidated EBITDA.
In 2009, CEMIG D sold 22.2 TWh in the state of Minas Gerais
and is Brazil's third largest electricity distribution company.
CEMIG GT is one of the largest Brazilian electricity generation companies
with an installed capacity of 6.9 GW. In the last twelve
months ended September 30, 2010, CEMIG posted net consolidated
sales of BRL12,418 million (USD 7,004 million) and net profit
of BRL1,697 million (USD 957 million).
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's Affirms CEMIG GT and CEMIG D at Baa3; outlook stable
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Sao Paulo, SP 04578-903