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Rating Action:

Moody's affirms Cemig's global scale rating of B1; upgrades national scale rating to Baa1.br; outlook changed to positive

 The document has been translated in other languages

03 Sep 2019

Sao Paulo, September 03, 2019 -- Moody's America Latina ("Moody's") has affirmed the baseline credit assessment (BCA) and global scale corporate family rating (CFR) of Companhia Energetica de Minas Gerais - CEMIG (CEMIG) of b1 and B1, respectively. The national scale CFR was upgraded to Baa1.br from Baa2.br. The outlook was changed to positive from stable.

Concomitantly, Moody's has affirmed the B1 global scale issuer and senior unsecured ratings of Cemig Distribuicao S.A. (CEMIG D) and upgraded the national scale issuer and senior unsecured ratings to Baa1.br from Baa2.br. The outlook was changed to positive from stable. Moody's has also affirmed the global scale issuer, senior unsecured, and senior secured ratings of Cemig Geracao e Transmissao S.A. (CEMIG GT) of B1, and upgraded the national scale issuer, senior unsecured, and senior secured ratings to Baa1.br from Baa2.br. The outlook was changed to positive from stable.

CEMIG is a government related issuer (GRI). The state of Minas Gerais (B2 stable) is the shareholder with majority control, with 50.96% ownership of common shares and 17.03% of overall shares. CEMIG's B1/Baa1.br ratings consider the following four input factors within Moody's GRI rating methodology: (i) a low-level probability of extraordinary support from the state should CEMIG face financial distress, (ii) Moody's estimates of a very high level of dependence between the company and the state, (iii) Moody´s rating of the state of Minas Gerais, as well as (iv) CEMIG's intrinsic credit profile as captured in the baseline credit assessment of b1.

RATINGS RATIONALE

The rating actions reflect a perception of ongoing improvement in CEMIG's liquidity profile, and a more prudent liability management strategy and financial policy. Following refinancing transactions concluded in late-2017, when the company faced dire debt refinancing needs, the organization has been able to actively manage its debt maturity profile while also reducing average cost of debt in line with the decrease in Brazil's interest base rate.

In July 2019, CEMIG D closed its 7th issuance of debentures amounting BRL3.7 billion with two series (BRL2.2 billion due 2024 and 1.5 billion due 2026) at an average annual cost of 108,61% of CDI. Proceeds of the issuance were used to prepay shorter and more expensive debt at CEMIG D, lengthening the company's average debt tenor, with pro-forma cash position after the issuance sufficient to cover short term debt maturities.

The rating actions also reflect continued progress to the asset divestment plan, with the recent completion of the sale of around 1/3 of its stake at Light S.A. (Ba3/A3.br stable), raising BRL625 million. CEMIG's partial divestment in Light is credit positive because it demonstrates management's continued commitment to a BRL8 billion asset divestment program announced in mid-2017. We estimate that after the conclusion of this transaction, CEMIG will have raised around BRL2.1 billion in asset divestitures, or around 26% of the initially envisioned amount.

Although there has been a positive trend in assets sales, we still consider CEMIG's leverage moderate and our base case does not take into account any additional deleveraging benefit from the divestment plan. However, credit metrics are expected to slightly improve on the back of decreased cost of debt and enhanced operational performance in the distribution business, with interest coverage exceeding 3.5x and CFO pre-W/C-to-Debt exceeding 23% over the next 12-18 months, compared to a three year average of 3.0x and 21%, respectively, between 2016 and 2018. Should the company close additional asset sales, we expect leverage to further decrease.

We also incorporate an expectation that CEMIG's retained cash flow metrics and free cash flow will meaningfully decrease next year based on higher dividend distributions following recognition of BRL1.9 billion of tax gains in its income statement last quarter, related to the outcome of a judicial dispute for calculation and payment of PIS/COFINS with double taxation considering ICMS tax. This gain was partially offset by a write-down of BRL688 million of accounts receivable from one of its investees, Renova Energia S.A. As a result, CFO pre-W/C -- Dividends to Debt should decline to around 10-12% over the next 12-18 months from an average of 17% between 2016 and 2018, but we consider that to be a one-off effect and that CEMIG will continue to prudently manage its cash position and dividend payout to stay in compliance with financial covenants.

The rating actions further reflect our view that the company continues to benefit from the cash flow generation of CEMIG D following the substantial tariff review in May 2018 (+23% increase in distribution tariffs), mainly as a result of around BRL5.0 billion in investments made in the distribution network over the previous review cycle. We expect an increase of around BRL500 million in CFO pre W/C for 2019 as result of the tariff review.

Last year, CEMIG D suffered a significant working capital pressure due to higher non-manageable costs of energy purchases that take at least one year to be incorporated in tariffs. However we take in consideration the fact that hydrology conditions have improved in 2019, which is positive for CEMIG's consolidated free cash flow generation.

The credit view continues to incorporate CEMIG GT's short and medium term commercial strategy, with maintenance of excess energy to cover exposure to hydrology risks. It does however reflect the large share of energy commercialization in the business, with energy commitments in excess of 200% of own generation. While the company has managed to be successful in its energy commercialization, it remains exposed to price risks in the long term, with high recontracting exposure particularly as of 2023, which is a risk to CEMIG GT in case if lower-than-expected energy prices.

The upgrade and change in outlook also consider that the company's credit quality is less linked to that of its controlling shareholder, the State of Minas Gerais (B2 stable).

The rating actions on CEMIG D and CEMIG GT reflect that of the consolidated profile of its parent company, CEMIG, given the corporate guarantees and cross default clauses embedded in the various debt instruments across the corporate family, as well as centralized cash management and use of intracompany lending.

RATINGS OUTLOOK

The positive outlook reflects Moody's expectations that the company's credit metrics will continue to be moderate going forward, driven by continuous deleveraging and prudent financial policy, in addition to an improved and more active liability management strategy and relatively stable operational performance.

WHAT COULD MOVE THE RATINGS UP/DOWN

The ratings could be upgraded should the company continue to build on a track record of improved financial policy and more active liability management, while at the same time, showing signs that CFO pre-WC/debt and CFO pre-WC + interest/interest will sustainably be above 18% and 2.5x, respectively. A successful privatization process would also put positive pressure on the ratings, as the consolidated credit quality of CEMIG is delinked from that of the State of Minas Gerais.

A rating downgrade, although unlikely at this time, could happen if we believe that the company's liquidity risks are not being prudently managed or if there is a sustainable increase in leverage such that the company's consolidated CFO pre-WC/debt remains below 15% and/or Net debt/EBITDA, according to covenant definitions, exceeds 3.5x by December 2019.

RATING METHODOLOGY

The principal methodologies used in rating Companhia Energetica de Minas Gerais - CEMIG were Regulated Electric and Gas Utilities published in June 2017, and Government-Related Issuers published in June 2018. The principal methodology used in rating Cemig Geracao e Transmissao S.A. was Unregulated Utilities and Unregulated Power Companies published in May 2017. The principal methodology used in rating Cemig Distribuicao S.A. was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com.br for a copy of these methodologies.

COMPANY PROFILE

Headquartered in Belo Horizonte in the State of Minas Gerais, CEMIG is a leading Brazilian integrated utility operating in the sectors of electricity distribution, generation and transmission, with 4,800 megawatts (MW) in installed capacity and around 8,200 km of transmission lines across the country. The company also owns controlling equity participation in the electricity utility Light S.A. and the transmission company Transmissora Alianca de Energia Eletrica (TAESA, Ba1/Aaa.br stable). Cemig is controlled by the State of Minas Gerais, which owns 50.96% of the company's voting capital. For the 12 months ended March 2019, Cemig had net revenue of BRL22.2 billion and EBITDA of BRL4.4 billion, respectively (according to Moody's standard adjustments).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, economic and demographic data, debt documentations, legislation, by-laws and legal documents, operating data, historical performance data, public information, Moody's information, government policy documents, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1188605.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1192148 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1192146 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action for Companhia Energetica de Minas Gerais -- CEMIG was 01/11/2018.

The date of the last Credit Rating Action for Cemig Geracao e Transmissao S.A. was 15/02/2019.

The date of the last Credit Rating Action for Cemig Distribuicao S.A. was 09/08/2019.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Bernardo Costa
Vice President - Senior Analyst
Project Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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