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Rating Action:

Moody's assigns Ba1 and Aa2.br ratings to Light Energia's debentures; outlook stable.

 The document has been translated in other languages

04 Apr 2011

Approximately BRL170 million of Senior Unsecured Debentures Rated

Sao Paulo, April 04, 2011 -- Moody's America Latina (Moody's) affirmed Light 's corporate family rating of Ba1 on the local currency on the global scale and Aa2.br rating on the Brazilian national scale. At the same time, Moody's assigned issuer ratings of Ba1 on the global scale and Aa2.br on the Brazilian national scale to Light Energia S.A. (Light Energia). Moody's has also assigned a Ba1 local currency rating on the global scale and Aa2.br rating on the Brazilian national scale to Light Energia's proposed up to BRL170 million senior unsecured debentures due in five years. These debentures will be supported by a corporate guaranteed of Light. The outlook is stable for all the ratings. This was the first time Moody's had rated Light Energia.

The 5-year issue is being offered under CVM's Regulation 476 with a firm underwriting commitment for up to BRL100 million from the arranging banks Bradesco BBI, Citibank and Itau BBA. The proceeds will be used to support investments and working capital needs of Light Energia.

Ratings Affirmed:

Issuer: Light S.A. (Light)

Corporate Family Ratings: Ba1/Aa2.br

Ratings Assigned:

Issuer: Light Energia S.A. (Light Energia)

Issuer Ratings: Ba1/Aa2.br

up to BRL170 million senior unsecured debentures guaranteed by Light S.A.(Light): Ba1/Aa2.br

RATINGS RATIONALE

The Ba1/Aa2.br issuer ratings reflect the Light Energia's solid capital structure, characterized by its low level of indebtedness, healthy debt maturity profile, steady cash generation and profitability. This largely stems from long-term concession contracts, which allows the company to operate its generation portfolio in a relatively secure regulated market until 2026. The uncertainties related to its capital expenditures program and potential for high dividend distributions in the future constrain the ratings. Moody's rates the proposed debentures of Light Energia at the same level as the corporate family rating of its parent company, Light, which is the guarantor of this debt. As a result, our assessment of Light Energia's ultimate financial strength largely reflects the rating assessment of Light based on its consolidated financial statements.

The Ba1/Aa2.br corporate family ratings reflect Light's strong consolidated credit metrics for the rating category. The group's relatively stable cash flow is largely derived from the regulated distribution business represented by Light Serviços de Eletricidade S.A. (Light SESA), which is Light's main subsidiary responsible for around 93% of consolidated Net Sales and 85% of consolidated EBITDA. Light's adequate governance practices and liquidity position also support the ratings. Constraining the ratings are a sizeable consolidated capital expenditure program, relatively high dividend distributions, potential cash flow drains related to existing contingent liabilities and the challenges from high levels of energy losses and delinquency rates at the distribution subsidiary.

The credit profile of the generation company, Light Energia, reflects adequate projected credit metrics for the rating category supported by stable operating margins and cash flows over the next two years. Light Energia's electricity supply contracts, which are mostly to the regulated market, lead to this stability. Nevertheless, these contracts will begin to expire in 2012. Accumulated expiring contracts represent approximately 27% of total assured energy by year-end 2012 and 51% by year-end 2013. Starting in 2013, Light Energia is expected to benefit from higher energy prices and enhanced operating cash flows. Light Energia's average energy prices are currently around BRL70 per MWh and preliminary estimates for new contracts indicate that energy prices could reach as much as BRL130 per MWh in 2013.

Light and its subsidiaries have significantly enhanced their capital structures since 2005 when EDF (Electricite de France), the sole shareholder at that time, converted around BRL940 million of inter-company loans into equity. Another BRL800 million conversion of debt into equity followed in 2007, this time by BNDES Participacoes S.A. (BNDESPar, the investment arm of the Brazilian Development Bank - BNDES). As a result, Light has a solid consolidated capital structure. Its leverage ratios are currently strong for the rating category. Using Moody's standard adjustments, Cash Flow From Operations before working capital needs (CFO pre --WC) to Debt is 41% and Debt over total capitalization is 50.6% as of December 31, 2010. These indicators are expected to deteriorate over the next three years as a result of Light's capital expenditures program and high dividend distributions to shareholders. Nevertheless, additional leverage is limited on a consolidated basis by the financial covenants embedded in the proposed debentures, which require Light's consolidated net debt to EBITDA to be lower than 3.0 times while EBITDA coverage of interest expense needs to be higher than 2.5 times.

Light currently has a number of judicial disputes at the level of the distribution company arising from a variety of sources, of which BRL552 million are considered a probable loss and accounted for as contingent liabilities. Although these liabilities are recorded as long-term items on the balance sheet, some of them could eventually be paid off in the short-term as a result of judicial settlements. Like most other Brazilian companies, Light does not maintain committed credit facilities to face unexpected large cash disbursements. Nonetheless, Moody's deems Light's liquidity as adequate. Stable and predictable operating cash flows from the regulated business support liquidity as does a consolidated cash position outstanding in the balance sheet of BRL525 million as of December 31, 2010. Light has short-term debt maturities of BRL664 million in 2011, calculated using Moody's standard adjustments for pension obligations and refinanced tax liabilities. These maturities will be largely addressed by a proposed issuance of BRL650 million debentures by Light SESA.

Moody's expects Light to make up to BRL3.4 billion of consolidated capital expenditures in the period 2011 through 2014. These are largely to develop the distribution network, improve system reliability, reduce energy losses and fund additional investments in the generation business. Management announced the construction of two small hydroelectric power generation units and one hydroelectric power plant with a combined installed capacity of 238MW, which are scheduled to come on stream from 2011 through 2013. Total investment in generation could reach BRL700 million over the next four years, with 60-70% of the long-term funding coming from the BNDES. Light is developing these generation projects in partnership with Companhia Energética de Minas Gerais (CEMIG; Ba1/Aa2.br Issuer Ratings; Outlook Stable). In the partnership, Light will own 51% and CEMIG 49% of the projects.

Going forward, Light is likely to continue this expansion strategy, particularly given the stated willingness of Light's major individual shareholder, CEMIG, to pursue strategic investments in the electricity sector. CEMIG has also recently been increasing its equity participation in the company. Moody's incorporates into its long-term rating assessment the potential risk that CEMIG will use Light as a vehicle to further expand its activities in distribution and generation businesses. Additional acquisitions and investments would not necessarily cause a rating downgrade, but the impact of future deals on consolidated leverage and liquidity will be particularly important in our analysis.

Light has evolving corporate governance practices that Moody's views as above the average for Latin American issuers. In March 2010, Light announced a significant change in the composition of its Board of Executive Officers, including the appointment of Mr. Jerson Kelman, former General Director of ANEEL, as the CEO as well as the appointment of four other senior executives. Moody's expects Light's new executives to face stepped-up pressure to enhance processes and strengthen the quality of service provided. They will look to balance the needs of shareholders and bondholders against the necessity of addressing the company's current challenging operational issues.

The stable outlook captures Moody's view that despite some expected reduction in operating margins, internal cash generation should be the primary funding source for the group's cash needs. Long-term funding on a timely basis will complement internal cash generation over the medium term. The overall level of debt should moderately increase along with the planned investments, remaining compatible with the current rating category.

The ratings or outlook could be upgraded as a result of greater visibility regarding the potential impact of both contingent liabilities and acquisitions on the group's consolidated cash flow and leverage. Pressure for an upgrade could increase if Light's consolidated Retained Cash Flow (RCF) over Total Debt remained higher than 20% and interest coverage (CFO pre-WC over cash interest) became higher than 5.0x, both on a sustainable basis.

The ratings or outlook could be downgraded if Light's consolidated RCF over Total Debt ratio fell below 10% and interest coverage decreased to below 3.0x for an extended period. A change in the supportiveness of the Brazilian regulatory environment could also trigger a rating action

Moody's National Scale 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 Ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only (GSR) 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 ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings"

The principal methodology used in rating Light Energia was the Global Unregulated Utilities and Power Companies published in August 2009.

Headquartered in Rio de Janeiro - Brazil, Light S.A. (Light) is an integrated utility company with activities in generation, distribution and commercialization of electricity. Light Energia S.A. (Light Energia), the generation subsidiary, has 855MW of total installed capacity representing approximately 0.8% of the country's electricity generation capacity. Light reported consolidated net revenues of BRL6,509 million (USD3,951 million) and Net Profit of BRL575 million (USD346 million) in 2010. Light Energia accounted for 5% of the revenues and 14% of the consolidated EBITDA.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Sao Paulo
Cristiane Spercel
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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 Ba1 and Aa2.br ratings to Light Energia's debentures; outlook stable.
No Related Data.
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