Fitch Upgrades Eletropaulo to 'B+'; Rates Debentures 'BBB'; Outlook to Stable

Business Wire, Dec 13, 2005

FRANKFURT, Germany & MILAN, Italy -- Fitch Ratings has upgraded the international local and foreign currency ratings, and the five-year bond issuance rating of US$200 million of Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo) to 'B ' from 'B'. The long-term national scale corporate rating and the rating of the eighth debenture issuance are also upgraded to 'BBB(bra)' from 'BB (bra)'. Concurrently, Fitch assigns the long-term national scale rating of 'BBB(bra)' to the ninth issuance of debentures, for a total value of R$250 million. A minimum of 90% of the resources from the issuance will be used for prepayment of debts renegotiated in 2004 and the balance will be used to adjust the swaps related to dollar-denominated debt that will be prepaid. Fitch revises the Rating Outlook to Stable from Positive for all ratings.

The upgrade reflects the company's improving credit-protection measures, which should strengthen over the next year, supported by projected growth in operating income and cash flow and the expected reduction in annual debt service. Eletropaulo should also benefit from the improved outlook for the Brazilian regulatory environment. While regulatory risk remains an ongoing credit concern, the approval last year of the new electric energy industry model is positive and provides some certainty with respect to the direction of the sector.

Eletropaulo has made significant strides in improving its capital structure following its debt re-profiling in May 2004. The company has reduced its exposure to foreign currency through the re-profiling, when it converted 70% of that debt to reais and, afterwards, issued in June 2005 an international bond in reais of R$474 million with a five-year maturity and a local debenture in September 2005 in the amount of R$800 million. A new proposed R$250 million, eight-year debenture should further this strategy, resulting in a total debt composition that better protects Eletropaulo from exchange rate fluctuations and benefits the company in terms of debt cost and maturity. The company is expected to continue issuing debt to refinance upcoming maturities and maintain a debt-to-EBITDA ratio between 2.5x and 3.0x. These issuances will be supported by the company's improving credit quality as well as continued strengthening in the Brazilian economic environment.

Eletropaulo has reported credit protection measures that are strong for the rating category. Through the third quarter of 2005, Eletropaulo reported net revenues of R$6.3 billion, up 17% from R$5.4 billion through September 2004. Despite increased revenues, reported EBITDA was lower, reflecting increased operating expenses mainly due to extraordinary and nonrecurring provisions (an allowance for doubtful debts of R$346.4 million based on an agreement signed with the Municipal Government of Sao Paulo) and a 10% raise in cost of energy purchased due to an increase in energy supplied by AES Tiete and payment of PIS/Cofins taxes. The company reported unadjusted EBITDA of R$839.8 million through September 2005 and R$993.7 million through September 2004.

Fitch has adjusted Eletropaulo's EBITDA to reach a more meaningful figure that provides a better indication of cash generation. In the first nine months of 2005 the adjustments include the positive adjustments for RTE (regulatory asset amortization) of R$251.3 million, interest on Fundacao CESP debt of R$40.7 million, which is also added to interest expense, and the addition of the non-cash provision of R$330.5 million. A negative adjustment is the PIS provision reversal of R$72 million, resulting in an adjusted EBITDA figure of R$1.4 billion. The LTM adjusted EBITDA (R$1.8 billion) covered interest expense of R$517.8 million by 3.5 times (x) through September 2005, compared to 3.2x in 2004. Revenues and adjusted EBITDA were positively affected by average tariff increases of 18.6% in July 2004 and 2.1% in July 2005, although the exit of the denominated free clients caused a reduction in sales in terms of energy sold (2.8%). Coverage ratios are expected to improve continued economic and electricity demand growth, annual tariff adjustments, and longer term as debt amortizes.

The ninth issuance of debentures, totaling BRL250 million, will be in a single series. The nonconvertible nonpreferred (chirograph) debentures have a term of eight years from the issue date of Dec. 20, 2005. Amortization of the operation will take place in three installments on Dec. 20, from 2011 to 2013. The remunerative interest, based on the accumulated variation of the one-day Inter-financial Deposits (DI rate) plus 2.5% a year, will be paid every six months with the first payment on June 20, 2006.

Eletropaulo is the largest electricity distributor in Latin America in terms of revenues. Eletropaulo essentially operates as natural monopoly for the distribution of electricity in its concession area. The company has a 30-year exclusive concession (beginning in 1998) to distribute electricity to a service territory that includes 5.3 million customers in 24 municipalities in the greater Sao Paulo metropolitan area.