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Rating Action:

MOODY'S UPGRADES TRANSELECTRICA'S SENIOR IMPLIED RATING TO Ba3 FROM B2, STABLE OUTLOOK

04 Oct 2004
MOODY'S UPGRADES TRANSELECTRICA'S SENIOR IMPLIED RATING TO Ba3 FROM B2, STABLE OUTLOOK

London, 04 October 2004 -- Moody's Investors Service has today upgraded Transelectrica S.A.'s senior implied rating to Ba3 from B2. The outlook is Stable.

The rating upgrade has been facilitated by a number of developments of which the most important are the following -- receipt of annual accounting information for 2003 (given that Transelectrica S.A's existing corporate identity was not formed until 2000 there has been historically little accounting information available); Transelectrica's continuing strategic importance to the national economy as well as fore-filling a key role in meeting EU accession requirements; and the expectation that regulatory developments will be broadly positive and in connection with this the signing of a concession agreement with the government regarding private patrimony.

Transelectrica remains 100% owned by the State and Moody's believes that the existing Romanian government, which has oversight of the company via the Ministry of Economy and Commerce and guarantees a very high proportion of the existing long term bank debt, will continue to act as a supportive shareholder which will seek to avoid potential financial stress arising at Transelectrica. The Ministry has provided a letter of support which recognises Transelectrica's strategic importance. Additionally Moody's believes that Transelectrica's regulatory position has been improved via the recent signing of a concession agreement with the government under which the company will own substations, systems and equipment, while the State will retain ownership of the electric lines. Not only does this clarify the issue of private patrimony (around 50% of the company's fixed asset base consists of assets owned by the State which are administered by Transelectrica), but as a result of the agreement, Transelectrica will be able to start depreciating electric lines from 2005 onwards. Moody's expects that such costs will now be covered in the regulators calculation of Transelectrica's regulated asset base from 2005, thereby improving Transelectrica's regulated revenue base.

Moody's believes that there is no reason why the Romanian Government, even if they had financial difficulties themselves, would stop Transelectrica meeting its debt obligations if it had the financial resources to do so.

Moody's regard the present regulatory cost plus mechanism as relatively benign, but expect that during 2005 a revenue-cap tariff setting method will be adopted. If this development does occur, as Moody's thinks likely, then a rate of return will have to be agreed by the regulator in which Moody's expects the recovery of all depreciation charges will be factored i.e., electric lines will be factored for the first time. Moody's expect that if the regulatory environment does change in the near future, such an environment will remain broadly benign for Transelectrica.

There remains an outstanding issue concerning circa Euro 6.6 million of unpaid dividends owing to the government -- the company are still negotiating as to when they will pay. Given the supportive nature of the government as the sole shareholder, Moody's whilst concerned by the potential impact to Transelectrica's liquidity, believe that it is highly unlikely that the government will seek immediate payment, but will most likely require these monies to be paid over a protracted period. Furthermore Moody's believe it likely that the current requirement to pay the government a dividend equal to 50% of Transelectrica's annual net profit will be eased in the future.

The expectation that future dividend payments will be at a lower proportionate rate is based on Transelectrica's business plan (as approved by the government), which calls for a significant increase in capex during the next 10 years. The major part of Transelectrica's asset base was constructed in the 1960's & 1970's, and has already exceeded its originally intended operational life. Relatively low utilisation of capacity as well as high expenditure on maintenance has kept this mature network operational, but major investment is required and Moody's expects to see capex levels exceed Euro 100 million p.a. over the next four years peaking at close to Euro 150 million in 2005.

Such large capex requirements are a concern, and although Moody's believe that the current and expected future regulatory environment as well as an average anticipated increase in electricity demand of close to 3% p.a. over the next 10 years will support year on year improvements in operational cash flow, debt levels are expected to rise from the Euro 85 million in 2003 to circa Euro 150 million in 2004 and continue to rise over the next few years. However, given the very high proportion of regulated revenue and a relatively supportive regulatory environment Moody's considers that Transelectrica will be able to maintain an adjusted retained cash flow to adjusted net debt ratio consistently above 20% and interest cover of at least 4 times during the next four years. Therefore in the absence of any liquidity issue arising Moody's is not expecting any negative pressure to evolve from the enhanced capex program.

Furthermore Moody's notes that the higher capex supports a key strategic aim of Transelectrica, in positioning the company to support a role as a major facilitator of the transmission of electricity on a European regional basis, whilst also helping to comply with EU electricity policy requirements.

Transelectrica S.A., which is headquartered in Bucharest, runs 8,950 km of over head lines and operates 77 substations, 1 national and 5 regional dispatch centres (covering 342 power units). The company accounts for transmission volume of around 67% of the electricity generated in Romania.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Aidan Fisher
Vice President - Senior Analyst
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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