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Announcement:

Moody's Affirms CEMIG GT and CEMIG D at Baa3; outlook stable

 The document has been translated in other languages

Global Credit Research - 04 Feb 2011

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 to stable.

The rating action affected the following debt issues:

CEMIG GT

- BRL 238.8 million due 2011 guaranteed by CEMIG - Baa3/ Aa1.br

- BRL 1,566 million due 2012 guaranteed by CEMIG - Baa3/ Aa1.br

- BRL 1,134 million due 2015 guaranteed by CEMIG - Baa3/Aa1.br

CEMIG D

- 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 governance practices.

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 TAESA acquisition.

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 GT.

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).

Sao Paulo
Jose Soares
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's Affirms CEMIG GT and CEMIG D at Baa3; outlook stable
No Related Data.
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