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Rating Action:

Moody´s downgrades ELETROPAULO to Ba1 from Baa3; outlook stable

 The document has been translated in other languages

Global Credit Research - 20 Sep 2013

Sao Paulo, September 20, 2013 -- Moody´s América Latina (Moody´s) downgraded Eletropaulo Metropolitana de Eletricidade de São Paulo S.A.'s ("ELETROPAULO", or the "Company") issuer ratings, to Ba1 from Baa3 on the global scale, and to Aa2.br from Aa1.br on the national scale rating (NSR). At the same time, Moody's downgraded the ratings of ELETROPAULO's BRL750 million senior unsecured debentures to Ba1 from Baa3 on the global scale, and to Aa2.br from Aa1.br on the NSR, as well as the ratings of the Company's BRL400 million subordinated debentures to Ba2 from Ba1 on the global scale, and Aa3.br on the NSR. The outlook is stable for all ratings.

RATINGS RATIONALE

The rating downgrade reflects the historic and our projected deterioration of the Company´s credit metrics, primarily due to lower tariffs and operating cash flows following the third periodic tariff review (which became effective on July 4, 2012), the required reimbursement of past revenues (BRL1.130 billion) due to the delayed implementation of the tariff review, and the high dividend distributions in the past which were reduced to 25% of net profit in 2012 from 50% in 2011 and 100% in 2010. The rating downgrade also reflects the potential impact of the next periodic tariff review (scheduled for 2015), which we expect will be partially offset by the interim annual tariff adjustments (set by the Regulator) as well as growing electricity demand, which is closely correlated with GDP growth.

The stable outlook reflects the Company's relatively stable operating cash flows from its long-term electricity distribution concession in Brazil's wealthiest metropolitan area, although, in our opinion, the Company will continue to face challenging conditions as a consequence of the third periodic tariff review cycle, and slower than originally forecast GDP growth despite the recent improvement of its operating indicators and lower dividend distributions. The stable outlook also reflects the Company´s positive track record in accessing the bank and capital markets, which we expect will continue in the short to medium term, and our expectation that the Company will continue to follow its recent more conservative dividend distribution policy.

In accordance with Moody´s standard adjustments, from 2010 to the last twelve months ended on June 30, 2013 (LTM 06/30/2013), ELETROPAULO´s Cash Flow from Operations (CFO) has fallen to BRL307 million in the LTM 06/30/2013 from BRL1.8 billion in 2010. Despite the recent downward adjustment in dividend distributions, which has led to an improved (CFO) pre-Working Capital (WC) minus Dividends-to-Debt ratio to 7.4% in the LTM 06/30/2013, from -6.1% in 2012 and -6.9% in 2011, the (CFO pre-WC + Interest)/Interest (or CFO pre-WC Interest Coverage) ratio fell to 2.4x (LTM 06/30/2013) from 5.0x (2010), and CFO pre-WC-to-Debt fell to 7.4% from 36.5% (over the same period). Also, Debt-to-EBITDA increased to 6.3x from 1.6x. As a result, the most recent historic metrics map to the Ba rating category, according to Moody´s methodology grid.

On a forward-looking basis, the Company´s CFO will be significantly impacted by the required reimbursement of BRL1.130 billion (as of July 2013) to customers, beginning in the second half of 2013 until 2015, as a result of the postponement of the Third Cycle Tariff Review, which was originally scheduled to take place in July 2011, but was moved to July 2012 by the Regulator. Two-thirds (2/3) of this amount (approximately BRL753 million) will have to be returned by the Company by the end of June 2014, and the remaining 1/3 (approximately BRL377 million) from July 2014 to June 2015.

In accordance with Moody´s standard adjustments, our credit metrics also incorporate the pension fund liability (with no immediate impact on liquidity), which, according to the Company´s audited financial statements, has decreased from BRL3.963 billion (December 31, 2012) to BRL3.109 billion (June 30, 2013) due to a higher domestic interest-rate environment. Notwithstanding, our projected credit metrics reflect the Company´s pension benefit payments ranging from BRL271 million (2013) to BRL284 million (2015), according to the Company´s actuarial assumptions.

The significant amount of funds to be returned between 2013 and 2015, combined with the Company's exposure to electricity spot prices due to increased thermal generation in the country could impact the Company´s liquidity position considering the timing effect of the transfer of funds from the Government-managed "Conta de Desenvolvimento Energético" (CDE) vis-à-vis spot power costs incurred. From July to December 2013, the CDE will reimburse these costs on a monthly basis, which will reduce the pressure on the Company´s liquidity. In addition, the Company has had a positive track record in raising financing from banks and from the capital markets, which we expect will address any potential immediate liquidity needs. However, we did not take into account the potential positive outcome of the Company's request to the Regulator to include previously disallowed assets into its rate base, given that the Regulator has now postponed its expected ruling to a date that still needs to be defined, nor the ongoing legal dispute with ELETROBRAS, which represents a contingent liability of approximately BRL1.3 billion. As a result, our projected credit metrics map to the Ba rating category, according to Moody´s methodology grid.

Given that the aforementioned constraining factors are expected to negatively affect the Company´s credit metrics in a material way, a rating upgrade is extremely unlikely in the short to medium term.

A rating downgrade could be triggered by the further deterioration of the Company´s liquidity position, any change in the perceived level of support from the electricity regulatory environment or from the Regulator, or a negative ruling to the Company on the legal dispute with ELETROBRAS. Quantitatively, the ratings could be downgraded if the CFO interest coverage remains below 2.0 times, and the CFO pre-WC-to-Debt falls below 7%, on a sustainable basis.

Eletropaulo Metropolitana de Eletricidade de São Paulo S.A. is a regulated electricity distribution utility, listed on the BM&FBOVESPA stock exchange. ELETROPAULO is controlled by its holding company Brasiliana, which in turn is owned by The AES Corporation (50% plus one share of the voting capital), and the Brazilian Federal Development Bank -- BNDES (50% less one share of the voting capital of Brasiliana). ELETROPAULO distributes electricity to 24 municipalities in the São Paulo metropolitan area, including the city of São Paulo, serving 6.6 million consuming units, with an estimated market share of 10% in Brazil. The Company has a 30-year concession contract that was granted by ANEEL, the Brazilian electricity sector regulator, in 1998.

As per Moody's standard adjustments, in 2012 ELETROPAULO had net sales of BRL9,128 million (excluding construction revenues), EBITDA of BRL 892 million, and net profit of BRL108 million, an increase of 0.34%, a decrease of 76.7% and 93.1%, respectively, as compared with 2011.

The principal methodology used in this rating was Regulated Electric and Gas Utilities Rating Methodology (August, 2009). Please see the Credit Policy page on www.moodys.com.br for a copy of this methodology.

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 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 ratings, please refer to Moody's Rating Methodology published in October 2012 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, parties not involved in the ratings, public information, 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.

The date of the last Credit Rating Action was on May 17, 2013.

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 www.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 ratings 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.

Alexandre De Almeida Leite
Vice President - Senior Analyst
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 downgrades ELETROPAULO to Ba1 from Baa3; outlook stable
No Related Data.

 

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