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Rating Action:

Moody's assigns Aa.1 br rating to Sao Manoel's debentures; outlook stable

 The document has been translated in other languages

Global Credit Research - 15 Aug 2014

Approximately, BRL 532 million of debt instruments affected

Sao Paulo, August 15, 2014 -- Moody's America Latina Ltda. assigned a Baa3/Aa1.br rating to the 18-month unsecured BRL 532 million debentures issued by Empresa de Energia Sao Manoel S.A. (Sao Manoel) on July 18, 2014, which were fully acquired by Banco do Brasil S.A (Baa2 stable).

RATINGS RATIONALE

EDP Energias do Brasil S.A. (EDB, Ba1 stable) guaranteed the debentures in proportion to its 66.7% participation in the capital of Sao Manoel while Banco Santander Brasil S.A. (Santander, Baa2 stable) guaranteed the remaining 33.3% through a banking guarantee on behalf of Furnas Centrais Eletricas S.A (not rated), a full subsidiary of Centrais Eletricas Brasileiras S.A. (Eletrobras, Baa3 negative) , which holds 33.3% of Sao Manoel' s capital. EDB and Santander provided their guarantees on a joint but not several basis.

Moody's has examined the documentation sent by Sao Manoel mainly consisting of the debenture indenture and banking guarantee. Moody's understands that based on its best knowledge that the corporate guarantee as described in the debenture indenture and the banking guarantee provided by Santander are legally valid, binding and enforceable. Both documents contain language that specifically addresses the irrevocable and irreversible nature of the guarantees provided by EDB and Santander. An external law firm has issued a legal opinion attesting that the guarantees are valid, enforceable and irrevocable in accordance with the laws of Brazil.

The Baa3/Aa1.br ratings reflect the lowest rating between the two guarantors. EDB's Ba1/Aa2.br Issuer rating is one notch lower than the implicit Baa3/Aa1.br Corporate Family rating because as a holding company debt holders at EDB are structurally subordinated to the debt holders at the operating subsidiaries. In the rating assessment of Sao Manoel's debentures Moody's has factored in the investment grade characteristics of EDB on a consolidated basis.

Sao Manoel will use the debenture proceeds to start construction work on the Sao Manoel 700 MW hydro-power plant. BNDES is expected to take out the BRL 532 million debentures by granting long-term debt in the same amount within the next 18 months. Sao Manoel will pay the principal and interest of the debentures only at the maturity date or when BNDES disburses the funding from the long-term debt before the agreed maturity date.

EDB can reduce its guarantee to 33.3% of the debenture amount during the debenture life provided CWEI Brasil Participacoes Ltda. (CWEI unrated), a full subsidiary of China Three Gorges Corporation (A1 stable), acquires 33.3% of Sao Manoel's Capital.

On February 7, 2014, EDB announced that it had divested 50% of its share in the Sao Manoel hydro-power project to CWEI. The divestment is still pending resolution of some regulatory procedures, but management is confident these issues will be resolved within the next couple of weeks.

The reduction of EDB's guarantee must be followed by CWEI presenting a banking guarantee, to be provided by one of the following banks: Santander Brasil (Baa2 stable), Banco Bradesco (Baa1 stable LT bank deposit (Domestic)), Caixa Economica Federal (Baa2 stable), Banco Itau Unibanco (Baa1 stable LT bank deposit (Domestic)), HSBC Bank Brasil (A1 stable LT bank deposit (Domestic)), Banco Safra (Baa2 stable). In addition, at least three fourths of the debenture holders need to approve the replacement of EDB's guarantee by the new banking guarantee as per the debenture indenture.

Also under the debenture indenture the banking guarantee provided by Santander on behalf of Furnas can be replaced by a corporate guarantee issued by Eletrobras, provided that at least three fourths of the debenture holders approve that change.

The consortium Terra Nova formed by EDB, with a 66.7% participation, and Furnas, with a 33.3% participation, won the energy auction coordinated by the Regulator ANEEL on December 13, 2013 to construct and operate the Sao Manoel 700 MW hydro-power project under a 30-year concession.

The consortium has the right to sell on average 409.5 MW in the regulated market at BRL83.49 per megawatt hour as of December 2013, to be annually adjusted by the consumer price inflation index (IPC-A). The consortium is committed to start delivering electricity in May 2018.

Management estimates that the power project will require around BRL 2.7 billion in capital expenditures, of which 66% will be funded by long-term financing.

The principal methodology use in this rating was "Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts" published in March 2013. Please see the Credit Policy page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from

Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However,

Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please see the special report "Services provided to entities rated by Moody's America Latina, Ltda." on our website www.moodys.com.br for further information.

Entities rated by Moody's America Latina Ltda(and the rated entities' related parties) may also receive products/services provided by parties related to Moody's America Latina Ltda engaging in credit ratings activities. Please go to www.moodys.com.br for a list of entities receiving products/services from these related entities and the products/services received. This list is updated on a quarterly basis.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's rating were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com.br for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Jose Manoel Soares
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns Aa.1 br rating to Sao Manoel's debentures; outlook stable
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