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Rating Action:

Moody's assigns BR-1 rating to Terna's Promissory Notes

 The document has been translated in other languages

04 Nov 2009

BRL550 million in debt securities affected

Sao Paulo, November 04, 2009 -- Moody's America Latina Ltda. (Moody's) has assigned a BR-1 rating to BRL 550 million in 360-day promissory notes issued by Terna Participações S.A. (Terna). At the same time, Moody's has assigned long-term issuer ratings to Terna of Baa3 on its global scale and Aa1.br on the Brazilian National Scale. The outlook is negative

The ratings reflect Terna's strong credit metrics for the rating category supported by stable and predictable cash flows provided by long-term concession contracts for electricity transmission. The ratings consider the evolving regulatory framework for transmission companies in Brazil, which is supportive and well developed but is relatively new and still untested. The rating is constrained by the uncertainties over the aggressive expansion program that maybe carried out by its new shareholder, with potential implications for its leverage and liquidity. The rating also considers the structural subordination of debt at Terna's holding company level to approximately BRL1.1 billion in guaranteed debt at the level of its operating subsidiaries. The promissory notes were issued by the holding company and do not benefit from upstream guarantees from the operating subsidiaries.

The current issuance of BRL 550 million promissory notes was intended to refinance an intercompany loan with its current parent, Terna Rete Elettrica Nazionale S.p.A (Terna SpA, A2, Stable), before the closing of the acquisition of 85.27% of Terna's voting capital and 65.86% of its total capital by Transmissora do Atlântico de Energia Elétrica S.A. --TAESA, a special purpose company owned by Cemig Geração e Transmissão (CEMIG GT, Baa3, Negative) and other equity investors, which is expected by November 03, 2009.

Moody's views the regulatory framework for transmission companies in Brazil as well developed and highly supportive but some procedures are still untested, such as the indemnification of non-depreciated assets upon the non-renewal or termination of an existing concession. The secure and stable nature of the transmission segment stems from the Permitted Annual Revenues (RAP), which are based on fixed capacity payments throughout the concession period that have provisions for automatic annual adjustments for inflation. Moody's notes, however, that the regulation for the transmission segment is evolving towards an incentive-based model, similar to the regulation currently in place for distribution companies. Terna operates eight transmission networks under long-term concessions expiring between 2030 and 2038. The company largely benefits from a portfolio consisting of concessions primarily granted before 2006 whose tariffs are not subject to periodic reviews. On the other hand, the RAP of these concessions is scheduled to step down 50% starting in 2016.

Terna has strong credit metrics for the rating category that are supported by long term contracts for electricity transmission. Returns are also enhanced by tax incentives that result in a reduced effective tax rate, which Moody's estimate at approximately 22% on average until 2013. Leverage as measured by Net Debt to Regulatory Asset Value (RAV), adjusted in accordance with Moody's standard adjustments, was 48% on average from 2006 through 2008, while the interest coverage ratio (ICR) was 2.3x, and Funds From Operations (FFO) to Net Debt was 26%. These metrics are strong for the Baa3 rating category; however, these strong metrics are partially offset by low Retained Cash Flow (RCF) to capital expenditures of only 0.14x on average during this period. The low RCF to capital expenditures is a combined result of the several business acquisitions that took place from 2006 through 2008, including the BRL 562 million paid for ETEO in 2008, and the relatively high dividend payout ratio.

Going forward, Moody's expects Terna's leverage to remain relatively stable at approximately 56% measured by Net Debt to RAV with an ICR around 2.4x. The healthy ICR is supported by the company's relatively low cost of funding influenced by subsidized loans from the BNDES (equivalent to 63% total debt on June 30, 2009). FFO to Net Debt is expected to increase over the next few years to the low 30% range as a result of margin improvements after the termination of the Engineering Procurement and Construction (EPC) agreement between Terna's subsidiaries TES (construction services) and Brasnorte (transmission) in 2009 along with the continued strong operating performance of Terna's other transmission subsidiaries. The consolidated RAP from July 01, 2009 through June 30, 2010 was set at BRL 798 million. The risk of these projections is additional acquisitions with possible implications on leverage and liquidity.

The negative outlook reflects the company's refinancing risk and relatively weak debt maturity profile. Terna's liquidity position has been historically constrained by its extensive capital investment program and high dividend distribution. The liquidity position will be further stretched over the next four quarters as a result of the distribution of approximately BRL 300 million of dividends before the closing of the acquisition by TAESA. While Moody's believes that Terna will prudently manage capital expenditures and keep dividends in line with available cash flow over the next twelve months, the company will need to rely on access to the capital markets or support from CEMIG GT and its other equity owners to address the October 2010 maturity of the BRL 550 million promissory notes.

The outlook is likely to be stabilized if the company successfully extends its debt maturity profile by reducing its short-debt to a level that is more compatible to its cash flow availability. A stabilization of CEMIG GT's outlook would also be important for a stabilization of the outlook at Terna.

The ratings could be downgraded if the company fails to extend its debt maturity profile or if its financial and operating performance deteriorate to the extent that the RCF to Capital expenditures drops below 1.0x (2.97x - 2Q09LTM) and the ICR falls bellow 2.0x (2.1x - 2Q09LTM) for an extended period of time.

Terna's Issuer Ratings take into account structural subordination of current and future debt at the holding company level. The ratings thereby reflect bondholders' distance from the operating subsidiaries' cash flows, the size of current and anticipated future debt levels to be carried by the operating entities and the possible negative consequences of the regulatory ring-fencing applicable to the operating companies for bondholders at Terna.

The Aa1.br national scale ratings reflect the standing of credit quality relative to 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. 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 BR-1 Brazil national scale short-term rating indicates an issuer with above average creditworthiness and superior ability to repay its short-term debt obligations relative to other Brazilian issuers. The Baa3 rating on Moody's Global Local Currency Scale compares the issuer to all other issuers in the world and addresses the ability to meet obligations in local currency, incorporating all Brazil risks, including the potential volatility of the Brazilian economy.

The principal methodology used in rating Terna was Regulated Electric and Gas Networks Rating Methodology (August 2009), which can be found at 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.

Terna Participações S.A. (Terna) is a holding company that operates 3,712 km high voltage transmission lines through five subsidiaries: Transmissora Sudeste Nordeste -- TSN, Novatrans Energia, Empresa de Transmisão Alto Uruguai - ETAU, Empresa de Transmissão de Energia do Oeste -- ETEO and Brasnorte. In the last twelve months ended June 30, 2009, Terna had consolidated net sales of BRL719 million (USD344 million) and net profit of BRL223 million (USD107 million). Terna's transmission activities are regulated by the Brazilian Energy Authority (ANEEL), an independent regulatory agency.

Sao Paulo
Jose Soares
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

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

Moody's assigns BR-1 rating to Terna's Promissory Notes
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