TEXT-S&P affirms Cemiq 'BB' rating;outlook remains stable
(The following statement was released by the rating agency)
Dec 06 -
-- Companhia Energetica de Minas Gerais S.A. (Cemig) is a leading player in Brazil's electric utility sector. The company has adequate credit metrics and a diversified portfolio of assets in the electricity generation, transmission, and distribution segments.
-- However, the uncertainties regarding to concession renewal for company's main power plants have increased recently, following enactment of Provisional Measure (Medida Provisoria) 579.
-- We are affirming our 'BB' issuer credit ratings on Cemig and its subsidiaries.
-- The stable outlook reflects our expectation that Cemig's credit metrics and liquidity will remain adequate, even though the company's business profile is constrained by the uncertainties related to the extension of the concession agreements.
On Dec. 6, 2012, Standard & Poor's Rating Services affirmed its 'BB' issuer credit ratings on Brazil-based electric utility holding company Companhia Energetica de Minas Gerais S.A. (Cemig) and its operational subsidiaries Cemig Distribuicao S.A. (Cemig D) and Cemig Geracao e Transmissao S.A. (Cemig GT). The outlook remains stable. The stand-alone credit profile (SACP) of these companies is 'bb'.
The ratings reflect the group's "fair" business risk profile and "significant" financial risk profile. Cemig's diversified portfolio of assets in the electricity generation, transmission, and distribution businesses also support the ratings. In accordance with our criteria for government-related entities, we believe that there is a "moderately high" likelihood that the Brazilian state of Minas Gerais (foreign and local currency ratings BBB-/Stable/--), which controls 51% of the company, will provide timely and sufficient extraordinary support for Cemig and its subsidiaries in the event of financial distress. Therefore, we do not incorporate any rating support from the controlling shareholder.
Cemig is a relevant entity in Brazil's electric utility sector. The company has a track record of investments that has provided it with a diversification of assets in its electric generation, transmission, and distribution businesses. We believe that the electric regulatory framework in Brazil constrains the group's business risk profile due to increased uncertainties related to the extension of the concession agreements of its main assets (three hydroelectric power plants), which mature from 2013 through 2105 and represent about 40% of the group's electric generation capacity.
The government of Brazil recently announced Provisional Measure 579 (MP 579), which, in summary, renovates the electric concession agreements in Brazil maturing until 2017 for another 30 years. The companies that accepted the proposed conditions will receive the termination value of the unamortized assets and operations and maintenance fees starting in January 2013. Although Cemig has already agreed to renovate the distribution and transmission assets, it did not accept the conditions to renovate the concession agreements for its electric generation assets.
The company considered the proposed terms for the renovation of these assets as unfavorable. And it is confident that its three main hydroelectric power plants, Sao Simao, Jaguara, and Miranda, do not fit under the MP 579 rules, since they hadn't received an extension, which according to company's management would be granted in the concession contract. Therefore, in a worst case scenario, if the contracts are not extended, Cemig will preserve these three assets' cash flows until the end of the concession contract and then return those assets to the government. Furthermore, Cemig is investing in new power plants to expand its total energy production, and we expect that the new assets will offset any potential capacity loss while preserving profitability in energy generation. Most of the company's new projects are also hydroelectric power plants.
The company will have to request an extension of the Jaguara plant's concession contract from the government in February 2013. During the next few months, we expect to have more clarity on the regulators' decision regarding the extension of these large energy generation power plants. Cemig's consolidated profitability remains stable, with an EBITDA margin of about 35% during the last three years due to strong cash contributions from the generation and transmission businesses. The tariff resets for the distribution companies will begin in second-quarter 2013 and result in lower operational margins, but we do not expect this to disrupt the cash flows. In addition, the company has maintained a high dividend payout (according to its bylaws, Cemig has to distribute at least 50% of its net income).
We view the company's financial profile as "significant." Cemig increased its financial leverage to fund acquisitions and its sizable investment in the electricity generation business. Although the company has historically distributed a high level of dividends, we believe that there is some flexibility in the event of a stress scenario. Cemig's consolidated credit metrics have remained fairly stable, and we expect the company to maintain adjusted total debt to EBITDA about 3.0x and funds from operations (FFO) to total debt of about 20%-25% under our base case scenario, which does not incorporate the renovation of the electric generation assets by the maturity date. We did not consider write-offs or termination value on those assets. We also assume that the company has certain flexibility regarding its investments, and it may use some of the cash proceeds from its recent agreement with the state of Minas Gerais to paydown debt. The state has agreed to advance the long-term payments to Cemig with a discount of 35%. The payments from this agreement should increase Cemig's cash holdings by about R$3.5 billion in 2013.
Cemig's liquidity has improved to "adequate," in our view. The company reported cash reserves of R$4.6 billion as of September 2012 and sizable short-term debt of R$6.9 billion.
Our liquidity assessment includes the following assumptions:
-- The liquidity sources (including FFO and other cash sources, such as anticipation of receivables and sale of transmission assets) will exceed cash uses by about 1.2x during the next two years;
-- The group has certain discretionary investments and the committed capital expenditures to large hydroelectric power plants have approved long-term funding from the Brazilian Development Bank (BNDES);
-- Cemig would meet its covenants--even if EBITDA were to decline by more than 30%; and
-- A minimum dividends distribution of 50%, as required the bylaw.
The stable outlook reflects our view that Cemig's credit metrics and liquidity will remain adequate, even though the company's business profile is constrained by the uncertainties related to the extension of concession agreements. We could raise the ratings if Cemig's business risk profile improves with reduction of these uncertainties and if the company is able to improve its credit metrics to adjusted total debt to EBITDA of 2.5x and FFO to adjusted total debt of more than 35%. We could lower the ratings if Cemig depletes its liquidity because of an aggressive investment plan combined with high dividend payments, leading to adjusted total debt to EBITDA that consistently exceed 4.0x and FFO to adjusted total debt of less than 20%.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
Companhia Energetica de Minas Gerais S.A.
Cemig Geracao e Transmissao S.A.
Global Scale Rating BB/Stable/--
Brazilian Scale Rating brAA-/Stable/--
Cemig Distribuicao S.A.
Global Scale Rating BB/Stable/--
Brazilian Scale Rating brAA/Stable/--
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