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Rating Action:

Moody's assigns Baa3 / Aa1.br ratings to CEMIG-D's BRL1.6 billion senior unsecured debentures; changes outlook to negative

 The document has been translated in other languages

22 Jan 2013

Sao Paulo, January 22, 2013 -- Moody's América Latina (Moody's) assigned the Baa3 rating on the global scale, and Aa1.br on the Brazilian National Scale Rating ("NSR") to CEMIG Distribuição S.A.'s ("CEMIG-D") new issuance of BRL.1.6 billion senior unsecured debentures. The debentures will be guaranteed by Companhia Energética de Minas Gerais -- CEMIG (the holding company). Concurrently, Moody's downgraded the Baseline Credit Assessment (BCA) of CEMIG to ba1 from baa3 due to expected lower cash flows as a result of the upcoming Third Tariff Review and the non-renewal of generation concessions expiring over the next several years. The outlook is negative.

At the same time, Moody's changed the outlook for CEMIG-D's and CEMIG Geração e Transmissão S.A.'s ("CEMIG-GT") senior unsecured ratings (domestic currency) to negative from stable, and affirmed CEMIG-D's and CEMIG-GT's senior unsecured ratings (domestic currency) on the global scale (Baa3) and on the NSR (Aa1.br).

Moody's also changed the outlook of CEMIG-D, CEMIG-GT and CEMIG issuer ratings to negative from stable. Concurrently, Moody's affirmed the issuer ratings on the global scale and the NSR, respectively, as follow: (i) CEMIG-D: Baa3/Aa1.br; (ii) CEMIG-GT: Baa3/Aa1.br; (iii) CEMIG: Ba1/Aa2.br.

CEMIG's BCA was changed as follows:

- Downgraded to ba1 from baa3.

CEMIG D, CEMIG GT and CEMIG's issuer rating outlook was changed as follows:

- To negative from stable.

CEMIG D, CEMIG GT and CEMIG's issuer ratings were affirmed as follows:

(i) CEMIG-D: affirmed at Baa3/Aa1.br;

(ii) CEMIG-GT: affirmed at Baa3/Aa1.br;

(iii) CEMIG: affirmed at Ba1/Aa2.br.

RATINGS RATIONALE

CEMIG-D's Baa3 and Aa1.br issuer and senior unsecured ratings reflect the overall investment grade profile of CEMIG on a consolidated basis, the stable and predictable operating cash flows from the electricity distribution business, the good track record in accessing the local bank and capital markets, strong management, above average corporate governance practices, and the support from the State of Minas Gerais (Baa3) to CEMIG´s consolidated group.

The change in outlook to negative from stable for CEMIG-D's ratings reflects the expected negative impact on operating cash flows from the third periodic tariff review starting in 2013 as well as the lag in tariff adjustments as a result of higher electricity prices due to a tighter domestic electricity supply in 2012 that is also expected to persist in the first quarter of 2013 , and the continuity in the Company's policy of paying out a significant amount of dividends to its controlling shareholder (CEMIG).

CEMIG-GT's Baa3 and Aa1.br issuer and senior unsecured ratings (including the ratings of CEMIG-GT's BRL1.35 billion senior unsecured debentures that were issued in January 2012) reflect the overall investment grade profile of CEMIG on a consolidated basis, the relatively stable and predictable cash flows from its large generation fleet, the good track record in accessing the local bank and capital markets, strong management, above average corporate governance practices, and the support from the State of Minas Gerais.

The change in outlook to negative from stable for CEMIG-GT's ratings results mostly from CEMIG's decision not to renew 3,619 MW of CEMIG-GT's installed capacity (52.5% of the group's total) holding concessions that will expire between 2013 and 2017 (424 MW in 2013; the remaining 3,195MW between 2015 and 2017), following the conditions set out by the Brazilian Federal Government (GOB) in the Provisional Measure (MP) #579 issued on September 11, 2012, which became law in December 2012.

We do not expect that CEMIG-GT will be indemnified for any non-depreciated portion of the assets once it returns these assets to the GOB. The change in outlook also reflects the fact that CEMIG-GT may face a potential electricity shortfall starting in 2015, which could impact the ability to meet its contractual electricity supply obligations given the scheduled loss of generating capacity, while we expect that the Company will continue to target the payment of a significant amount of dividends.

CEMIG´s issuer ratings of Ba1 on the global scale and Aa2.br on the NSR largely reflect the structural subordination of the holding company vis-à-vis its operating subsidiaries (i.e. CEMIG-D and CEMIG-GT). The downgrade in the BCA and the change in outlook reflects the significant impacts expected on CEMIG-D and CEMIG-GT as mentioned above, given that CEMIG-D and CEMIG-GT account for the vast majority of the CEMIG's consolidated revenues, EBITDA and cash flows.

CEMIG is Brazil's second largest integrated power utility group, with equity stakes in more than 110 companies, operating in the electricity sectors of generation, transmission and distribution. CEMIG is publicly traded on the local (BM&FBOVESPA), New York (NYSE) and Madrid (LATIBEX) stock exchanges. The government of the State of Minas Gerais holds 50.96% of CEMIG's voting capital, and 22% of its total capital.

CEMIG-D is one of the largest distribution companies in Brazil, with a total concession area of 567 thousand square kilometers (Km2), serving 774 cities, and 7.4 million consumers. Based on interim financial statements of September 30, 2012, CEMIG-D accounts for 50% of CEMIG's consolidated net sales, 25% of consolidated EBITDA, 28% of CEMIG's consolidated cash position, and 26% of consolidated indebtedness. CEMIG-D is CEMIG's second largest company in terms of EBITDA, following CEMIG-GT, which accounts for approximately 59% of CEMIG's consolidated EBITDA (based on interim financial statements of September 30, 2012). CEMIG-GT is currently one of the largest Brazilian electricity generation companies, with an installed capacity of 6,900 MW. CEMIG is the only shareholder of CEMIG-D and CEMIG-GT owning 100% of their voting capital.

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 11 (mapping to a Ba1)

- High-level dependence (70%)

- Moderate level of government support (31-50%)

- The Baa3 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.br for additional information on GRIs.

Given the effects of the third periodic tariff review on CEMIG-D, the significant impact of the non-renewal of CEMIG-GT's expiring concessions, CEMIG's ambitious capital expenditure and acquisition program as well as the track record of large dividend distributions, the likelihood of a rating upgrade in the short to medium term is extremely low.

The ratings could be downgraded if CEMIG-GT and CEMIG-D do not adjust their respective dividend distributions and operating costs to their new economic realities in a timely manner, and if CEMIG-GT and/or CEMIG continue to make large equity investments or acquisitions but fail to secure long-term financing at reasonable terms that will allow them to preserve an adequate level of liquidity and robust capital structure.

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.

The methodologies used in this rating were "Regulated Electric and Gas Utilities" published in August 2009, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale 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 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 ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.br.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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.

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 see the special report "Services provided to entities rated by Moody's America Latina, Ltda." on our website www.moodys.com.br for further information.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

The date of the last Credit Rating Action for CEMIG GT was January 25, 2012.

The date of the last Credit Rating Action for CEMIG was February 4, 2011.

The date of the last Credit Rating Action for CEMIG D was February 4, 2011.

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

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

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. Please go to www.moodys.com.br for a list of entities receiving products/services from these related entities and the products/services received. This list is updated on a quarterly basis.

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.

Alexandre De Almeida Leite
Vice President - Senior Analyst
Infrastructure Finance Group
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

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 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: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns Baa3 / Aa1.br ratings to CEMIG-D's BRL1.6 billion senior unsecured debentures; changes outlook to negative
No Related Data.
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