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Rating Action:

Moody's downgrades Cemig and its subsidiaries to B2/Ba1.br from B1/Baa1.br; outlook remains negative

 The document has been translated in other languages

07 Jun 2017

Sao Paulo, June 07, 2017 -- Moody´s América Latina (Moody´s) downgraded to B2/Ba1.br (Global Scale and Brazil National Scale, respectively) from B1/Baa1.br the senior secured and unsecured debt ratings assigned to the subsidiaries of Companhia Energetica de Minas Gerais´ ("Cemig" or the Company): Cemig Geracao e Transmissao S.A ("Cemig GT") and Cemig Distribuicao S.A ("Cemig D"). Moody´s also downgraded the issuer ratings of Cemig D to B2/Ba1.br from B1/Baa1.br.

As part of this rating action, Moody´s assigned Corporate Family Ratings of B2/Ba1.br (Global Scale and Brazil´s national scale, respectively) to Cemig and assigned issuer ratings of B2/Ba1.br to Cemig GT. In addition, the agency withdrew Cemig´s B1/Baa1.br issuer ratings as well as Cemig GT Corporate Family Ratings of B1/Baa1.br.

The outlook on all ratings remains negative.

ISSUERS AND RATINGS AFFECTED

Companhia Energetica de Minas Gerais

-- Corporate Family Ratings assigned at B2 (Global Scale) and Ba1.br (Brazil National Scale)

-- Issuer Ratings of B1 (Global Scale) and Baa1.br (Brazil National Scale) withdrawn

-- Outlook: negative

Cemig Geracao e Transmissao S.A.

-- Senior secured and unsecured debt ratings downgraded to B2/Ba1.br from B1/Baa1.br (Global Scale and Brazil National Scale, respectively)

-- Issuer Ratings assigned at B2 (Global Scale) and Ba1.br (Brazil National Scale)

-- Corporate Family Ratings of B1 (Global Scale) and Baa1.br (Brazil National Scale) withdrawn

-- Outlook: negative

Issuer: Cemig Distribuicao S.A.

-- Issuer Ratings and senior unsecured debt ratings downgraded to B2/Ba1.br from B1/Baa1.br (Global Scale and Brazil National Scale, respectively)

-- Outlook: negative

For further information, please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br

RATINGS RATIONALE

The ratings downgrade reflects Moody´s perception of growing debt refinancing risks facing Cemig in the context of a charged short term debt maturity profile and the company´s limited liquidity. The company´s short term liquidity pressures will be compounded by obligations related to a put option contract of approximately BRL1.6 billion on shares of the electricity utility company Light S.A (B1/Baa1.br positive) that have to be paid by November. The rating action also reflects Moody´s expectations that the company's free cash flow generation will remain negative in the next 12 to 18 months, adding pressure on Cemig´s needs to execute on its planned asset sales and refinance its debt maturities.

The B2/Ba1.br ratings remain supported by: (i) Cemig's solid market position, economic relevance as well as by the company´s established relationship with domestic banks that, Moody's considers, could facilitate the company's debt refinancing strategy, (ii) Cemig's large and diversified pool of assets that can be sold to provide cash or pledged as guarantees to secure further financings including the non-pledged listed shares held by Cemig in Transmissora Alianca de Energia Eletrica and Light S.A; and (iii) Moody´s expectations of gradual improvements in operating performance and cash flow generation resulting from a supportive tariff review for Cemig D due next year as well as from slowly declining domestic interest rates and Brazil´s gradual economic recovery.

The negative outlook reflects the material execution risks related to the company's plans to refinance and sell assets to address its short term debt maturities and other obligations.

In 2016 Cemig saw a marked deterioration in its operating performance as a result of a sharp decline in energy sales, a negative tariff adjustment affecting its distribution business and impairments on the company´s equity participation in greenfield projects. Cemig's weak operating performance translated into weaker credit metrics. The company´s CFO pre WC to debt fell to 17.4% in 2016 from 25.5% in 2015, while its CFO pre WC interest coverage dropped to 2.4x from 3.9x in 2015.

Moody´s notes that during Q1 2017 the company's performance improved visibly with revenues and EBITDA growing by 8% and 71% respectively. Notwithstanding, Moody's expects Cemig's EBITDA and operating cash flow generation will close the year broadly in line with 2016 and result in negative free cash flow generation in 2017.

Cemig has announced a BRL 6.6 billion divestment program. The company aims to complete at least 50% by H2 2018. While Moody's recognizes the company's efforts to pursue assets sales, it considers the timing and value of the sale of those assets uncertain at this stage. The agency notes that many of the asset sale negotiations are still at an early stage or have yet to start, providing unclear source of revenues in the short term.

Cemig's liquidity profile is weak. As of 31 march 2017 the company faced BRL4.3 billion of debt maturing in 2017 and BRL3.9 billion during 2018, which compares to a cash & cash equivalents position of only BRL1.7 billion (including cash and short-term investments). Moody´s anticipates that the company's free cash flows will be negative in 2017 and only neutral in 2018 driven by expectations of a slow recovery in operating performance and the impact of higher capital expenditures in the distribution segment. The negative free cash flow in 2017 will leave the company dependent on debt refinancing and asset sales to be able to service its debt in the next 12-18 months. Moody's expects that Cemig's long standing relationship with local and federal banks will support the company's refinancing strategy going forward, even if at higher costs. The agency expects Cemig to be able to monetize its unpledged equity participation in the listed companies Taesa and Light to repay its upcoming debt maturities should its long term refinancing plan fail.

WHAT COULD CHANGE THE RATING UP/DOWN

In light of the negative outlook, an upgrade of the ratings is unlikely in the near term. A stabilization of the outlook could be considered upon visible improvements in Cemig's liquidity profile and operating performance such that CFO pre WC interest coverage ratio exceeds 3.0x, and CFO pre WC to debt remains above 20% on a sustainable basis.

Further deterioration in Cemig's liquidity or the company´s inability to extend the average tenor of its debt maturity profile, either with internally generated cash flows or via alternative sources of funding could lead to a downgrade.

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 over 8.000MW in installed capacity and approximately 4,700km of transmission lines across the country. The company also owns controlling equity participation in the electricity utility Light S.A (B1/Baa1.br positive) and the transmission company Transmissora Alianca de Energia Eletrica (Ba2/Aa2.br negative). Cemig is controlled by the state of Minas Gerais (B1 negative) which owns 50.69% of Cemig's voting capital. In 2016 Cemig reported net revenues and EBITDA of BRL19 billion and BRL 2.6 billion respectively.

The methodologies used in rating Companhia Energetica de Minas Gerais - CEMIG were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. 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 December 2013. Please see the Rating Methodologies page on www.moodys.com.br for a copy of these methodologies.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

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, public information, Moody's information, 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/viewresearchdoc.aspx?docid=PBC_193459.

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/ 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/viewresearchdoc.aspx?docid=PBC_195748 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/viewresearchdoc.aspx?docid=PBC_195749 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 5/7/2016

The date of the last Credit Rating Action for Cemig Geracao e Transmissao S.A. was 15/2/2017

The date of the last Credit Rating Action for Cemig Distribuicao S.A. was 5/7/2016

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 or category/class of debt, this announcement provides certain 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 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.

Paco Debonnaire
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
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: 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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