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Rating Action:

Moody's upgrades CEMIG to Baa3; outlook stable

 The document has been translated in other languages

10 Dec 2008
Moody's upgrades CEMIG to Baa3; outlook stable

Approximately BRL 840 million in debt securities affected

Sao Paulo, December 10, 2008 -- Moody's América Latina (Moody's) upgraded the global scale rating for Companhia Energética de Minas Gerais (CEMIG) to a Baa3 local currency issuer rating from a Ba2 local currency corporate family rating. At the same time, Moody's upgraded CEMIG's Brazil national scale rating to an Aa1.br issuer rating from an Aa3.br corporate family rating. Moody's also upgraded to Baa3 from Ba2 the issuer ratings of CEMIG DISTRIBUIÇÃO S.A (CEMIG D) and CEMIG GERAÇÃO E TRANSMISSÃO S.A (CEMIG GT). The issuer ratings of CEMIG D and CEMIC GT were also upgraded to Aa1.br from Aa3.br in the Brazilian national scale. The outlook for all ratings is now stable. This action concludes the review for upgrade initiated on August 11, 2008.

The rating action affected the following debt issues:

CEMIG GT

- BRL 238.8 million due 2011 guaranteed by CEMIG

- BRL 349.6 million due 2009 guaranteed by CEMIG

CEMIG D

- BRL 250.5 million due 2014 guaranteed by CEMIG

Moody's upgrade of CEMIG's ratings results from Moody's recent upgrade of the level of supportiveness of Brazil's regulatory environment (SRE) for regulated electric utilities, as explained in a Special Comment entitled "Regulatory Environment Improves For Brazilian Utilities" published on August 25, 2008. The upgrade of the SRE level is important to the ratings of CEMIG because Moody's ratings for electric utilities generally assign about equal importance to regulatory and other qualitative factors as they do to issuer-specific financial metrics. Moody's upgraded the level of supportiveness in Brazil to category 3, in accordance with Moody's Rating Methodology: "Global Regulated Electric Utilities' (March 2005). This category indicates a regulatory framework that is well developed but still has lower assurance of timely cost recovery. Previously, Brazil's SRE was category 4, which is reserved for the least supportive regulatory frameworks.

In accordance with Moody's methodology for government regulated utilities, or GRIs, CEMIG's Baa3 issuer rating reflects the combination of the following inputs:

- Baseline credit assessment (BCA) of 10 (mapping to a Baa3)

- High-level dependence

- Mid-level government support

- The Ba3 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 for additional information on GRIs.

CEMIG's Baa3 global scale rating reflects its healthy profitability and strong cash generation, which should allow the utility to maintain its solid credit metrics and liquidity profile. The ratings also reflect CEMIG's integrated position as one of the largest utilities in both the distribution and generation businesses in Brazil. The company's track record for managing cash outlays for capital expenditures and dividends to maintain indebtedness at adequate levels vis-à-vis cash generation is also a key consideration. Finally, the ratings incorporate Moody's expectation that cost recovery mechanisms will continue to allow CEMIG to maintain strong cash flow as compared with its total debt, both before and after considering working capital and regulatory assets/liabilities.

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.

Moody's estimates that CEMIG's consolidated cash flow as measured by funds from operations will decline moderately to approximately 30% of adjusted debt over the next twelve months as a result of the recent 18.09% reduction in CEMIG D's electricity tariffs and increased interest expense resulting from the recent spike in local interest rates. Higher operating margins in the generation segment, as CEMIG GT gradually benefits from higher electricity tariffs, should temper this decline. Moody's estimates that the net effect on distribution tariffs for CEMIG is around 9% given that the reduction of some non-controllable costs, considered by the regulator in the second periodic tariff review in April 2008, partly offsets lower revenues.

Given the sizeable amount of cash generation resulting from recovery of deferred tariff adjustments, cash from operations before working capital should remain above 30% of total adjusted debt at least over the next two years. The major downside risk to this level of cash flow coverage is a further devaluation of the local currency, which negatively affects the cost of dollar-denominated electricity purchased by CEMIG D from the Itaipú hydroelectric facility. However, we expect that existing cost recovery mechanisms would allow cash flow to recover from the impact of higher costs driven by a weaker currency.

Moody's ratings assume that CEMIG will maintain its solid capital structure and liquidity profile, with funds from operations (FFO) above 25% of total adjusted debt on a consistent basis. The company's announced acquisition strategy and high dividend payout constrain the ratings. However, Moody's expects that CEMIG will continue to manage its acquisition strategy, dividend payout and capital expenditures to maintain adequate credit metrics for its rating category. Added comfort stems from the fact that CEMIG currently has strong credit metrics for the Baa3 rating category.

The ratings or outlook could be downgraded if there is a deviation from the historical cash flow pattern that results in a significant deterioration of CEMIG's capital structure. Quantitatively, retained cash flow to total adjusted debt of below 15% and interest coverage of below 3.5 x for an extended period of time could trigger a downgrade.

The rating or outlook could be upgraded as a result of greater visibility with regard to future capital expenditures, acquisitions and dividend payments and their potential impact on capital structure and leverage. Quantitatively, an upgrade could result from retained cash flow to total adjusted debt of above 30% and interest coverage of above 5.5 x on a sustainable basis.

A deterioration or improvement in the level of ongoing support from the Brazilian regulatory framework could also lead to a change in the outlook or the rating.

The last rating action for CEMIG was August 11 when the ratings were put on review for possible upgrade after the upgrade of the level of supportiveness of Brazil's regulatory environment (SRE) for regulated electric utilities.

The principal methodology used in rating CEMIG was the Global Regulated Electric Utilities Rating Methodology (March 2005), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Headquartered in Belo Horizonte, state of Minas Gerais, Companhia Energetica de Minas Gerais - CEMIG - is a public holding company with interests 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 2007, CEMIG D sold 20.7TWh in the state of Minas Gerais and is Brazil's third largest electricity distribution company. CEMIG GT is one of the largest Brazilian electricity generation companies with an installed capacity of 6.7 GW. In the last twelve months ended on September 30, 2008 CEMIG posted net consolidated sales of BRL 10,834 million (USD 5,672 million) and net profit of BRL 1,872 million (USD 980 million).

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

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

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