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Rating Action:

Moody's assigns Ba1/Aa2.br ratings to Light SESA's Debentures

 The document has been translated in other languages

15 Jun 2009

Approximately BRL 300 million in debt instruments affected

Sao Paulo, June 15, 2009 -- Moody America Latina's assigned a Ba1 local currency corporate family rating and Aa2.br corporate family rating on the Brazilian National Scale to Light S.A ("Light"). At the same time, Moody's assigned a Ba1 local currency rating and Aa2.br rating on the Brazilian National Scale to the 2-year BRL 300 million senior unsecured debentures to be issued in the local market by Light Serviços de Eletricidade S.A ("Light SESA").

The ratings reflect Light's strong consolidated credit metrics for the rating category, the relatively stable cash flow derived from the regulated distribution business of Light SESA and the long-term supply contracts of the generation segment represented by Light Energia. The ratings are constrained by a sizeable capital expenditure program, relatively high dividend pay-out ratios, potential cash flow drains related to existing contingent liabilities, the uncertainty over the evolution of the Brazilian regulatory framework and challenges represented by high levels of electricity losses and delinquency rates.

Light and its subsidiaries have significantly enhanced their capital structures since 2005 when EDF (Electricité de France), the sole shareholder at that time, converted around BRL 940 million of inter-company loans into equity. This was followed by another BRL 800 million conversion of debt into equity by BNDES Participações S.A. (BNDESPar, the investment arm of the Brazilian Development Bank - BNDES) in 2007.

The reduction in the level of indebtedness has been accompanied by an improvement in operating margins, though these have been below potential levels because of very low rates of growth for electricity consumption in 2004 through 2008 and a high level of electricity losses and bad debt provisions. Light's electricity consumption CAGR (compound annual growth rate) was just 1.9% from 2004-2008, compared to a 4.0% CAGR for the Brazilian electricity industry as a whole. The lower consumption growth rates are largely attributable to the migration of large industrial consumers from the city of Rio de Janeiro to other localities. The other classes of electricity users have basically behaved in line with growth rate patterns for all of Brazil.

Light has posted energy losses of around 20% over the past five years, a figure much higher than the 15% national average. Despite the company's investments in new technologies to reduce energy losses to levels that are more acceptable, these efforts have not generated any significant improvement and the outlook for further improvement is not promising. Management has signaled that with annual investments of BRL 150 million these losses could eventually come down to around 18% within four years. Light's bad debt provisions as a percentage of gross revenues have been decreasing over the last five years from around 5.2% to 2.9% per year, however it is still much higher than the 0,90% acknowledged by the regulator.

Projections indicate that Light will post satisfactory cash flow within the next couple of years in light of prevailing favorable operating margins. As part of the second periodic tariff review, the regulator granted Light a 2% tariff increase in November 2008. These periodic tariff reviews are primarily aimed to adjust a company's tariffs to generate more efficient operational parameters as determined by the regulator and transfer back to the consumer the gains in productivity attained since the last tariff review in 2003.

Like those of other distribution companies in Brazil, Light's operating margins are expected to decrease going forward; however, the regulator considered some issues specific to Light's tariff structure. It increased the regulated level of energy losses from the prevailing 16% to 19% and compensated the company through higher tariffs for the migration of three important free consumers from its distribution network to the basic network starting in 2009. As a result, the negative impact of the second periodic tariff review on operating margins will be relatively lower when compared to other Brazilian distribution utilities, which in most cases had negative tariff adjustments. In addition to lower operating margins going forward, sales volumes in the captive (regulated) market are expected to range between break-even and 1.5% growth in 2009 due to weak Brazilian GDP growth in 2009.

The generation business is projected to post stable operating margins and consequently more stable cash flows. This stems from the inherent long-term nature of Light Energia's electricity supply contracts which are mostly to the regulated market. These contracts will begin to expire in 2013, with accumulated expiring contracts representing approximately 27% of total assured energy by year-end 2013 and 51% by year-end 2014. Thus, starting in 2013, Light is expected to benefit from higher energy prices and enhanced operating cash flows. Light's average energy prices are currently around BRL 67 per MWh and preliminary estimates for new contracts indicate that energy prices could go to over BRL 130 per MWh. However, Moody's notes that Light's generation subsidiary is not a guarantor of the rated debenture issuance.

Indebtedness is bound to marginally increase from 2009 through 2012 as a result of forecasted negative free cash flow in the range of BRL 200 million per year in the next two years. Long-term funding is expected to make up for the cash flow gap. FFO (Funds From Operations) are projected to average BRL 1.0 billion in the next two years or around 28% of total adjusted debt, which compares favorably with historical performance considering the recent periodic tariff review and the current economic downturn.

Capital expenditures are forecasted at BRL 700 million per annum in the next 4-year period. These are largely to reduce energy losses and expand investment in the generation business. Management announced the construction of three small hydroelectric power generation units with an installed capacity of 238MW, which are scheduled to come on stream from 2011 through 2013. Total investment in generation could reach BRL 750 million over the next four years. The long-term funding should come largely from the BNDES in an estimated amount that could reach BRL 500 million.

Contingent liabilities recognized as long-term liabilities were BRL 988 million as of March 31, 2009. Out of this amount around BRL 500 million are associated with tax disputes and could potentially have a cash impact in 2009 as a result of ongoing judicial settlements to be concluded within the coming months. Management estimates that approximately half of the fiscal contingencies can be refinanced with the federal government for over a five-year period under specific government programs designed for this purpose. The size of total contingent liabilities is relatively high at around BRL 4 billion but the bulk of these liabilities are classified as possible or remote, and as such are not recognized in financial statements.

Like other Brazilian companies, Light does not maintain committed credit facilities to face unexpected cash disbursements. Despite this restriction, Light's liquidity is adequate, as evidenced by a consolidated cash position of BRL 736 million as of March 31, 2009 that comfortably covers short-term debt of BRL 328 million. Forecasted negative free cash flow of around BRL 100 million in the next twelve-month period is expected to be mostly funded with the proceeds of the proposed debentures of around BRL 300 million and BNDES in the BRL 230 million range.

Light's dividend policy assures a minimum 50% dividend pay-out to shareholders. Moody's utilized a higher pay-out ratio of 95% in its base case forecast scenario, in which internal cash generation and new long term funding, mainly from BNDES, remain sufficient to cover cash outlays, while indebtedness is maintained at manageable levels.

The stable outlook captures Moody's view that despite some expected shrinkage in operating margins, internal cash generation should be the primary funding source for the company's cash needs and is likely to be complemented by long-term funding on a timely basis in the medium term. The overall level of debt should remain virtually unchanged, remaining compatible with the rating category.

The ratings or outlook could be upgraded as a result of greater visibility regarding the potential impact of contingent liabilities on cash flow and leverage. Also important to an upgrade would be progress in reducing the company's high levels of bad debt provisions (currently at 2.9% of gross revenues) and energy losses (currently at 20.8%). Pressure for an upgrade could increase if Retained Cash Flow (RCF) over Total Adjusted Debt remains higher than 20% (32% in the last twelve months ended March 31, 2009) and interest coverage (CFO before working capital needs over cash interest) remains higher than 5.0x (7.9x in the last twelve months ended March 31, 2009) on a sustainable basis.

The ratings or outlook could be downgraded if RCF over adjusted debt ratio falls below 10% and interest coverage decreases 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 outlined its views regarding the supportiveness of the Brazilian regulatory environment in the special comment "Regulatory Environment Improves For Brazilian Utilities" published on August 25, 2008 and available on www.moodys.com. In addition to being affected by the above factors, the ratings for the debentures could also be downgraded without a downgrade of the corporate family ratings at Light S.A. if there is a significant increase in secured debt as a proportion of total debt at Light SESA (secured debt currently represents 17% of total adjusted debt).

The principal methodology used in rating Light was Global Regulated Electric Utilities Rating Methodology (March 2005), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Light S.A. (Light), headquartered in Rio de Janeiro, Brazil, is an integrated utility company controlled by Rio Minas Energia Participações S.A. (RME) with activities in generation, distribution and commercialization of electricity. In the last twelve months ended March 31, 2009, the distribution company Light Serviços de Eletricidade S.A. (Light SESA) distributed 23,122 GWh of electricity (approximately 6% of the electricity consumed in Brazil) and represented around 86% of Light's consolidated EBITDA. Light reported consolidated net revenues of BRL 5,508 million (USD 2,776 million) and Net Profit of BRL 1,038 million (USD 523 million) in the last twelve months ended March 31, 2009. Light SESA reported consolidated net revenues of BRL 5,237 million (USD 2,639 million) and Net Profit of BRL 998 million (USD 503 million) in the same period.

Sao Paulo
Jose Soares
Asst Vice President - Analyst
Global Infrastructure Finance
Moody's America Latina Ltda.
55-11-3043-7300

New York
William L. Hess
Managing Director
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba1/Aa2.br ratings to Light SESA's Debentures
No Related Data.
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