Approximately BRL2.9 billion of debt instruments affected
Sao Paulo, January 12, 2010 -- 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 to be issued by CEMIG GT. The debentures, guaranteed
by Companhia Energética de Minas Gerais ("CEMIG"),
will be issued in two series with tenors ranging from two to five years.
The proceeds of the debentures will be used to take out the existing promissory
notes in the same amount issued mostly to fund the acquisition of Transmissora
Aliança de Energia Elétrica S.A. ("Aliança"),
formerly known as Terna Participações S.A.
this November. The final settlement of this transaction should
be completed by this January when the new shareholders will extend the
offer to minority shareholders.
The Baa3 issuer rating of CEMIG GT reflects 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 governance
The ratings are constrained by an aggressive capital expenditure and acquisition
program, the risks associated with the potential for political interference
by the Government of the state of Minas Gerais into CEMIG's business
strategy and the evolving Brazilian regulatory framework.
The negative outlook reflects CEMIG's aggressive acquisition strategy
and the potential implications this has for CEMIG's leverage and liquidity,
in combination with CEMIG's relatively short-term debt maturity
profile. "While additional acquisitions would not necessarily cause
a downgrade, Moody's analysis of the impact of future deals
on consolidated leverage and liquidity would be important to the rating"
said Moody's analyst Jose Soares, author of a pre-sale
report on CEMIG GT.
On December 31, 2009, CEMIG's announced a share purchase
agreement to increase its participation in the capital of Light S.A
(Light, Ba1/Aa2.br, stable), an integrated company
whose primary business is the distribution of electricity in the State
of Rio de Janeiro. CEMIG currently holds approximately 13%
of Light's voting and total capital and is expected to hold up to
26% after the completion of this transaction. The total
acquisition amount could reach BRL1.6 billion, but cash disbursement
of CEMIG should be restricted to around BRL785 million since the remaining
portion is expected to be funded by an equity fund in a similar financial
structure as used for the acquisition of Aliança. CEMIG's
internal cash generation in the near term is expected to generally cover
this transaction but Moody's believes that management would wisely
approach either the banking or the capital markets to preserve its liquidity
positions. This acquisition is in line with CEMIG's current
long-term strategy to consolidate its position in the Brazilian
electricity industry. Formal approval from debt holders and the
electricity sector regulator, ANEEL, are still pending and
the expected closing is forecasted for the first quarter of 2010.
The major impact on liquidity is mitigated provided CEMIG successfully
extends its debt maturity profile, which will be partially accomplished
through the issuance of the BRL 2.7 billion debentures.
While the initial higher leverage of current and potential new acquisitions
should be somewhat offset by higher cash generation in the medium to long
term, the outlook is unlikely to stabilize until the company institutes
financial policies that provide for a stronger liquidity profile on a
sustainable basis and a capital structure that does not have significant
ongoing near-term debt maturities.
Moody's reiterates its opinion from its last rating action on CEMIG that
the acquisition of Aliança should provide long-term value
to shareholders given potential synergy gains and the inherent stability
of the cash flow of the transmission business in Brazil. However,
Moody's expects that FYE 2009 credit metrics will come under moderate
pressure because of the initial increased leverage from the transaction
but expects to see improvement in these metrics by year-end 2010.
Leverage as measured by the ratio of CEMIG's consolidated Debt to
EBITDA is likely to move from the latest 3-year average of 2.3x
to around 3.0x, while cash flow from operations (CFO) to
debt is forecasted to fall from the 3-year average 34% to
the 23-27% range within the next three years. However,
cash interest coverage (CFO + Interest over Interest) is expected
to remain virtually stable at 4.0x mainly as a result of the recent
significant reduction in local interest rates. These projections
do not consider any potential synergy gains and make relatively conservative
assumptions for dividend distributions and capital expenditures.
As a result, credit metrics are expected to compare slightly unfavorably
against the Baa3 Brazilian utility peer group, although metrics
will remain strong for the rating category compared to global peers.
The ratings outlook could become stable if CEMIG institutes financial
policies that provide for a stronger liquidity profile and capital structure
without ongoing near-term debt maturities. Any material
change in the assessment of the level of supportiveness of the Brazilian
regulatory framework could also impact the rating or the outlook.
The ratings could be downgraded if CEMIG continues to make sizable acquisitions
and fails to institute financial policies that provide for a stronger
liquidity profile and capital structure without ongoing near-term
debt maturities. The ratings could also be downgraded if retained
cash flow to total adjusted debt drops below 15% or interest coverage
falls below 3.5x for an extended period.
The Aa1.br national scale rating assigned to the debentures reflects
the standing of the company's credit quality relative to its 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 October 16, 2009 when Moody's
confirmed 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 downgraded to Ba1 from Baa3 on its global
scale and from Aa1.br to Aa2.br on the Brazil national scale
the issuer rating of the holding company Companhia Energética de
Minas Gerais (CEMIG) to reflect the structural subordination to indebtedness
at the operating subsidiaries. The outlook for all ratings was
changed to negative.
The principal methodology used in rating CEMIG GT was Moody's Regulated
Electric and Gas Utilities Rating Methodology, published in August
2009 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in Belo Horizonte, state of Minas Gerais, Companhia
Energética de Minas Gerais - CEMIG - is a public
holding company with interests mainly 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
85% of consolidated Net Sales and EBITDA. In the last twelve
months ended September 30, 2009, CEMIG posted net consolidated
sales of BRL11,089 million (USD5,169 million) and net profit
of BRL 1,708 million (USD796 million).
CEMIG GT, wholly owned by CEMIG, is one of the largest Brazilian
electricity generation and transmission companies with an installed capacity
of 6.32GW and 5,969 Km of transmission lines. CEMIG
GT also holds significant stakes in generation and transmission companies.
The most relevant investment in a subsidiary is the recent acquisition
of 65.85% of Aliança's total capital,
through its subsidiary Transmissora do Atlântico de Energia Elétrica
- TAESA. In the last twelve months ended September 30,
2009, CEMIG GT posted net consolidated sales of BRL 3,382
million (USD1,576 million) and net profit of BRL1,213 million
More detailed information on the company and ratings rationale is conveyed
on a pre-sale report available at ww.moodys.com
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Moody's assigned Aa1.br rating to CEMIG GT debentures; outlook negative
William L. Hess
Infrastructure Finance Group
Moody's Investors Service