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Rating Action:

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

 The document has been translated in other languages

04 Apr 2011

Approximately BRL650 million of Senior Unsecured Debentures Rated

Sao Paulo, April 04, 2011 -- Moody's América Latina (Moody's) affirmed Light S.A.'s (Light) corporate family ratings of Ba1 on the global scale and Aa2.br 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 Serviços de Eletricidade S.A. (Light SESA). 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 SESA's proposed up to BRL650 million senior unsecured debentures due in five and seven years. These debentures will be supported by a corporate guarantee of Light. The outlook is stable for all the ratings.

The issue is being offered under CVM's Regulation 476 with a firm underwriting commitment for the whole amount from the arranging banks Itau BBA, Bradesco BBI e Citibank. The proceeds will be used to repay Light SESA's short-term debt maturities and to support its corporate investments.

Ratings Affirmed:

Issuer: Light S.A. (Light)

Corporate Family Ratings: Ba1/Aa2.br

Ratings Assigned:

Issuer: Light Serviços de Eletricidade S.A. (Light SESA)

Issuer Ratings: Ba1/Aa2.br

up to BRL650 million senior unsecured debentures guaranteed by Light S.A.(Light): Ba1/Aa2.br

RATINGS RATIONALE

The Ba1/Aa2.br issuer ratings reflect Light SESA's stable and predictable cash flows derived from its regulated distribution business but are constrained by the potential cash flow drains related to existing contingent liabilities and the challenges from high levels of energy losses and delinquency rates. Moody's rates the proposed debentures of Light SESA at the same level as the corporate family rating of its parent company, Light, which is the guarantor of this debt. Considering that Light SESA is the principal subsidiary of Light, our assessment of Light SESA's financial strength largely reflects the rating assessment of Light based on its consolidated financial statements.

Light's Ba1/Aa2.br corporate family ratings reflect its strong consolidated credit metrics for the rating category. The relatively stable cash flow derived from the regulated distribution business of Light SESA, which is the primary support for this stability along with the medium-term supply contracts of the generation segment represented by Light Energia S.A. (Light Energia). 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 and the potential impact of acquisitions on cash flow and leverage.

Light SESA's annual Cash Flow From Operations (CFO) has been in the range of BRL1.0 billion to BRL1.3 billion since 2007. These cash flows derive from the company's monopoly rights to provide the essential service of electricity distribution in a relatively wealthy service area in the state of Rio de Janeiro. Nevertheless, Light SESA's operating margins have been below their potential because of low rates of growth for electricity consumption in its concession area over the last five years, continued high levels of electricity losses and high delinquency rates.

Another important factor constraining the ratings has been the evolving Brazilian regulatory framework, which is well developed but has a limited track record of support to entail timely recovery of costs and investments. In 2010, Light SESA's operating margins remained low while the company contended with higher administrative expenses (controllable costs) in face of a modest tariff adjustment of 0.88% that the regulator ANEEL granted in November 2009. Despite the positive tariff adjustment of 8.31% granted in November 2010 to compensate for higher controllable costs, Moody's expects operating margins to remain low in 2011 pressured by higher electricity purchase costs (non-controllable costs). Going forward, Moody's expects higher volatility in operating margins and cash flow parameters as measured by funds from operations (FFO) given that the IFRS does not provide for the accountability of regulatory assets and liabilities and all the changes in non-controllable costs needs to be expensed in the income statement rather than deferred for later recovery.

The expiration of approximately 42% of Light SESA's existing power purchase agreements from 2013 through 2015, which are currently priced at approximately BRL80 per megawatt-hour, will also cause increased volatility in operating margins of the distribution business. Moody's expects an increase of approximately 30% in the re-pricing of those contracts, with a 12-month lag for the effective pass-through of those costs to higher tariffs. Moody's expects an effective reduction of operating margins in 2014 as a result of the third cycle of periodic tariff review scheduled to occur by the end of 2013. The periodic tariff review aims at adjusting the company's tariffs to reflect the typical more efficient operational parameters as determined by the regulator and to transfer to consumers the productivity gains attained since the last tariff periodic review in 2008. Moody's expects a tariff reduction to stay within the 4-6% range, which translates to an EBITDA reduction of approximately 20% in 2014.

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 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 the 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, but it should remain compatible with the current rating category.

The ratings or outlook could be upgraded as a result of progress in reducing the company's high levels of bad debt provisions (currently at 3.2% of gross revenues) and total energy losses (currently at 21.3%). Also important to an upgrade would be 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 and Light SESA was Regulated Electric and Gas Utilities 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. The distribution company, Light Servicos de Eletricidade S.A. (Light SESA), is Light's main subsidiary responsible for around 93% of consolidated Net Sales and 85% of consolidated EBITDA. In 2010, Light SESA distributed 22,384 GWh of electricity (approximately 5.3% of the electricity consumed in the Brazilian Integrated National System). Light reported consolidated net revenues of BRL6,509 million (USD3,951 million) and Net Profit of BRL575 million (USD346 million) in 2010.

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 SESA's debentures; outlook stable.
No Related Data.
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