MOODY'S ASSIGNS B2 RATING TO CESP; OUTLOOK STABLE
Sao Paulo, December 26, 2005 -- Moody's Investors Service ("Moody's") assigned
today a B2 global local currency ("GLC") corporate family
rating to CESP - Companhia Energetica de São Paulo.
The rating outlook is stable.
With over 73% of its voting shares directly and indirectly owned
by the Government of the State of São Paulo ("State"),
CESP is qualified by Moody's as a Government-Related Issuer
("GRI"). According to Moody's rating methodology
for GRIs (please refer to Moody's special comment "Rating
Government-Related Issuers in Americas Corporate Finance"
at moodys.com), CESP's B2 GLC corporate family rating
reflects its baseline rating, and incorporates Moody's view
of the medium default dependence between CESP and the State of São
Paulo in addition to Moody's expectation of a medium level of support
that would be provided by the State if CESP if the company were to require
an extraordinary bailout.
The baseline rating of CESP reflects Moody's view of the very high
fundamental credit risk of CESP, and consequently, of a high
likelihood that the company will require an extraordinary bailout in the
foreseeable future. To a large extent, this is based on the
high refinancing risk deriving from its excessive indebtedness when compared
to cash flow generation. The baseline rating also incorporates
the company's significant devaluation and interest rate risks,
the hydrology risk, and the still existing uncertainties related
to Brazil's regulatory framework. The baseline rating is,
however, supported by the company's position as Brazil's
second largest power generator and its strong operating margins.
CESP plays a major role in the country's energy sector, representing
some 8% of Brazil's power generation capacity, and
about 11% of the country's installed capacity of hydraulic
energy generation. The company also represents about 59%
of the energy generated in the State of São Paulo -- the main
industrial state in Brazil representing around 1/3 of the national GDP
- and 37% of the state's energy consumption in 2004.
Its strategic importance to the regional and national economies is evidenced
by the fact that around 50% of CESP's total adjusted debt
(including underfunded pension obligations and refinanced taxes) is owed
to the Federal Government, including BNDES, and is mostly
guaranteed by the State.
Operating efficient and low-cost hydroelectric plants, CESP
has historically reported strong EBITDA margins in the mid-to-high
70s range. Moody's believes that the company's EBITDA
margin will decline moderately in 2005 and 2006 as a result of the lower
energy prices achieved in the energy auction of December 2004 within the
new regulatory framework. However, operating margins should
be able to, rebound to historic levels thereafter as contracted
energy prices increase along with the market's general perception
of higher potential for power shortage in 2009 given the growing demand
for energy combined with the delay to expand the country's generation
CESP is part in several legal disputes originated prior to the spin-off
of its privatized distribution subsidiaries (Elektro, Eletropaulo,
Bandeirantes, etc), which were ultimately assumed by CESP.
At 12/31/2004 these contingencies amounted to BRL 2,205 mln,
of which 23% were provisioned and 5% covered with pledged
CESP's energy is generated exclusively by hydroelectric plants with
significant geographical concentration of its plants. Over 99%
of its generation capacity is located in the western part of the State
of São Paulo, partially on the Tietê river and,
more significantly, on the Parana river that results from
the merger of the Grande and Paranaiba rivers. The company's
Três Irmãos (on the Tietê river) and Ilha Solteira
(on the Parana river) operate on an integrated basis, with
their respective water reservoirs connected by a 9-km long canal.
In 2001 and 2002 the energy sector in Brazil was severely impacted by
a 9-month power rationing period due to insufficient rainfalls
in the country's southeastern and mid-western regions (where
CESP's plants are located) during 4 consecutive years, only
comparable with the 1952-1956 period.
Moody's believes that the risk of a new rationing caused by unfavorable
hydrologic conditions has decreased significantly over the past years
in view of the expansion of the transmission network connecting the different
regions of the country, and the construction of thermopower plants
that provide flexibility to the ONS to manage the water reservoir levels
in a way to substantially reduce hydrology risk.
Following the 2001/2002 rationing period, changed habits of the
consumers led to reduced demand for energy by power distribution companies.
As a consequence, CESP concentrated efforts on direct sales to final
consumers - the so-called "free consumers" --
with a substantial diversification of its customers base. Although
the significant portion of revenues generated from the sale of energy
to free consumers within the unregulated energy market is, in general,
regarded with reserves by Moody's, we understand the risk
is somewhat mitigated by the company's diversified client base,
contractual guarantees, and by the standardization of the supply
contracts that are registered with the regulator ANEEL. CESP's
rating also incorporates the existing uncertainties related to the Brazilian
regulatory framework for power companies, which Moody's views as
still under development.
Moody's recognizes the joint-effort of CESP's management
and the State of São Paulo to improve the company's debt
profile and capital structure through the gradual replacement of foreign
currency debt with local currency loans and through the announced capital
increase of CESP with the proceeds from the privatization of CTEEP -
Companhia de Transmissão de Energia Eletrica Paulista for
estimated BRL 1 billion. This capital injection is expected to
take place in the first quarter of 2006.
Although CESP is contractually committed to use the proceeds of the capital
injection to repay BNDES debt, Moody's expects that the still
excessive indebtedness after the capitalization and the high cost of its
debt will continue to impair the company's profitability and constrain
free cash flow. In addition, CESP will continue to show high
devaluation and interest rate risks, as some 46% of the company's
debt is denominated in foreign currency while revenues are originated
exclusively in local currency, and a significant portion of CESP's
local currency debt is indexed to floating interest rates.
A medium level of dependence reflects the close relationship between CESP
and the State as characterized by the State's majority ownership
and oversight role in the company's strategic plans and financial
operations. The company's lack of own internal liquidity
suggests that it would not be able to survive a default by the State.
A medium level of support reflects the strategic importance of the company
to the State's economy. In addition, the probability
of support reflects the perceived impact that a default of CESP could
have on the reputation of the State and its other publicly-owned
The stable outlook reflects Moody's expectation that CESP will continue
to present a high refinancing risk, despite support from the State
of São Paulo and the Federal Government.
WHAT COULD CHANGE THE RATING UP OR DOWN
CESP's rating could come under upward pressure in the event of a
consistent decrease in its indebtedness, higher levels of predictable
state support, or improved creditworthiness of the State of São
Paulo, together with a general improvement in the Brazilian regulatory
Conversely, the rating would come under downward pressure should
the level of the State's support be reduced and / or the creditworthiness
of the State of São Paulo deteriorate.
Headquartered in São Paulo - Brazil, CESP is the country's
second largest power generator, majority owned by the State of São
Paulo. CESP operates 6 hydroelectric plants with total capacity
of 7,456 MW and reported net revenues of BRL 1.9 billion
(approximately USD 690 million) in the last twelve months through June
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Chee Mee Hu
Senior Vice President
Corporate Finance Group
Moody's Investors Service