Fitch Upgrades Eletropaulo; Assigns 'B' to Proposed US$200MM Issuance

Business Wire, June 14, 2005

CHICAGO -- Fitch Ratings has upgraded the international local and foreign currency ratings of Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo) to 'B' from 'B-' and concurrently assigned a preliminary rating of 'B' to the proposed five-year bond issuance of up to US$200 million. The long-term national scale corporate rating also was upgraded to 'BB (bra)' from 'BB(bra)'. Proceeds of the proposed debt issuance will be used to refinance existing bank debt and for general corporate purposes. All ratings also have been assigned a Positive Outlook.

The upgrades reflect Eletropaulo'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. The company earlier this year prepaid debt by approximately R$184 million with proceeds of the third tranche of the rationing loan (R$243 million, representing 90% of rationing losses for 2002) and the company paid its scheduled amortization in March 2005 in the amount of R$62 million. The company's debt structure includes an amortization schedule that reduces refinancing risk over the next few years and should result in lower total debt levels. Eletropaulo should also benefit from the improved outlook for the Brazilian regulatory environment.

Projected operating cash flow is expected to be sufficient to meet scheduled debt service payments as well as projected capital expenditures over the next few years. At least 50% of the proceeds of the proposed international bond issuance will be used to refinance on a pro rata basis a portion of the R$1.8 billion (US$670 million equivalent) bank debt (as of March 2005) that was restructured in 2004. The new debt issuance would further lengthen the average life though slightly increasing overall interest expense. Even with the proposed new five-year bullet maturity, the amortization schedule should result in a material deleveraging of the company over the next few years. Longer term, Fitch expects that the company will likely issue additional debt depending on market conditions to maintain a balanced capital structure consistent with a debt-to-EBITDA ratio of 2.5x-3.0x.

The company is supported by its large, stable customer base but continues to be pressured due to lower demand following the electricity rationing of 2001 and the beginning of 2002, as consumption growth has been slow to materialize. Going forward, the company expects stable demand levels through 2005 with modest growth beginning in 2006. Future improvement in operating cash flow should also benefit from improving operating efficiencies and a more favorable economic environment.

Through March 2005, net revenues were BRL2 billion (versus BRL1.6 billion on March 2004) and un-adjusted EBITDA was BRL289 million (versus BRL258 million). Debt-to-EBITDA improved to 4.6x in first-quarter 2005 compared to 5.1x in first-quarter 2004. Revenues and EBITDA for first-quarter 2005 and fiscal year 2004 were positively affected by a 17.9% average tariff increase in July 2004, which included 50% of the deferred CVA adjustment from 2003, and an additional 0.7% increase in September 2004.

On an adjusted basis, which includes the positive adjustment for RTE (regulatory asset amortization), interest on Fundacao CESP debt and an adjustment of CVA (cash costs paid but not reported), adjusted EBITDA figures for 1Q2005, 1Q2004, and full year 2004 are R$618 million, R$359 million and R$2.1 billion, respectively. The increase in adjusted EBITDA in 2005 primarily reflects past costs now being recovered (including Itaipu energy purchases, ESS (System Service Charge), and CDE (Energy Development Account)) and a temporary favorable above-average spread between sale tariffs and energy purchases. Resulting debt-to-adjusted EBITDA through March 2005 (LTM) was 2.3x while adjusted EBITDA covered cash interest expense by 4.3x, an improvement over fiscal 2004 ratios of 2.5x and 3.5x, respectively. Coverage ratios are expected to improve in the near term, reflecting an expected positive annual tariff adjustment in July and continued consumption growth, and longer term as debt further amortizes.

Eletropaulo is the largest electricity distributor in Latin America in terms of revenues. Eletropaulo essentially operates as a 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 5.1 million customers in 24 municipalities in the greater Sao Paulo metropolitan area.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.