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Announcement:

Moody's revises the outlook of CESP to positive; affirms existing ratings

21 Dec 2012

Sao Paulo, December 21, 2012 -- Moody's Investors Service (Moody's) revised the outlook of Companhia Energética de São Paulo's ("CESP") ratings to positive from stable, based on the upgrade of the State of São Paulo's rating to Baa2 from Baa3 and revised outlook to positive from stable. At the same time, Moody's affirmed CESP's Corporate Family Rating (CFR) at Ba1, the Baseline Credit Assessment (BCA) at ba2, and the ratings of the Company's senior unsecured debt at Ba1.

RATINGS RATIONALE

CESP is Brazil's fourth largest electricity generation utility. Its generating fleet is composed of six hydroelectric plants with nameplate capacity of 7,456 MW, with 3,916 MW of physical guaranteed capacity. CESP's controlling shareholder is the State of São Paulo, which owns 94.1% of CESP's voting capital, and 36% of its total capital. Therefore, Moody's considers CESP a Government-Related Issuer (GRI).

Moody's methodology for GRIs ("The Application of Joint-Default Analysis to GRIs") incorporates the Company's stand-alone credit risk profile (BCA), the likelihood that both entities (CESP and the State of São Paulo) would default at the same time, and the probability that the controlling shareholder (the State of São Paulo) would provide extraordinary support to the Company's financial obligations. Therefore, CESP's Ba1 GRI rating results from the application of the joint-default analysis of the Company's BCA of 12, the Baa2 rating of the State of São Paulo, our view of CESP's high dependence on the State of São Paulo (i.e. the likelihood that both entities would default at the same time), and the high probability of extraordinary support from its controlling shareholder.

CESP's BCA of 12 (which maps to Ba2) is based on our methodology for the ratings of "Unregulated Utilities and Power Companies" and reflects: (i) the relatively predictable operating cash flows until and after 2015; (ii) the consistent deleveraging process that has taken place in the last four years which has resulted in significant improvement in the Company's credit metrics; (iii) strong support from the State of São Paulo; and (iv) the low expected capital expenditures (primarily maintenance).

On December 3, 2012, Companhia Energética de São Paulo ("CESP") turned down the proposal from the Brazilian Federal Government set out in the Provisional Measure #579 ("MP579") for the renewal of the Company's 5.8 GW installed capacity concessions (equivalent to 2.8 GW average net assured energy) ahead of their scheduled expiration in 2015. By turning down the Federal Government's offer, CESP will keep the concessions until their expiration in mid-2015 when CESP will return them to the Federal Government, and then be entitled to receive an indemnification of up to BRL1.8 billion (at current value) representing the value of the non-depreciated assets of the expired concessions related to the Três Irmãos, Ilha Solteira and Jupiá hydroelectric plants. We note that CESP's Três Irmãos hydroelectric plant (808 MW nameplate capacity; 246 MW physical guaranteed capacity) concession expired in November 2011, and may have to be returned to the Federal Government as soon as 2013 which is expected to result in the payment of the largest portion of the indemnification amount before 2015. This results from the fact that a large portion of this asset has not yet been fully depreciated, with the portion of the indemnification related to Três Irmãos representing almost the entire amount (BRL1.8 billion), while Ilha Solteira's indemnification would be only BRL21 million. Jupiá would not be indemnified since it has been fully depreciated.

The non-renewal of the expiring concessions under MP579 conditions will allow CESP to avoid the reduction of its electricity prices currently ranging from BRL95 to 100/MWh to the BRL20-25/MWh range. This would have had a significant negative impact on CESP's cash flow generation which we estimated at a BRL1.8 billion reduction both in annual revenues and annual EBITDA (assuming no immediate change in company's cost structure) combined with an indemnification of BRL1.8 billion, far less than the BRL7.1 billion book value of the assets under the expiring concessions.

With the July 2015 expiration of two concessions, CESP will become a significantly smaller company in terms of generation capacity and revenues. Nevertheless, by continuing its financial deleveraging process, CESP's indebtedness will decrease in the same proportion, which will help reduce the pressure on the Company's BCA.

Also, CESP's decision has prevented a potential mismatch related to approximately 700 MW of average energy between PPAs in the free (unregulated) market and available generating capacity, given that MP579 would have required the allocation of the expired concessions capacity to regulated market customers (i.e. distribution companies), resulting in the lack of generating capacity to fulfill the obligations under legally-binding PPAs that have been executed with free-market customers.

Notwithstanding, CESP's BCA is constrained by the potential risks and uncertainties associated with: (i) the Company's ability to timely align its current cost structure to its new economic reality; (ii) how the Company will manage its dividend distributions and deleveraging process; (iii) the potential volatility of energy prices for the non-contracted portion of its assured energy; (iv) interest rate and exchange rate volatility; (v) the final amount of contingent liabilities; and (vi) the timing and amount of the indemnification of the already-expired Três Irmãos concession.

CESP's ratings could be upgraded if there is a material improvement in CESP's cash flow generation such that Cash Flow from Operations (CFO) Pre-Working Capital (WC)-to-Debt remains above 20%, and Cash Flow Interest Coverage stays above 3.6x on a sustainable basis. Lower contingent liability payments and a timely indemnification payment for the Três Irmãos concession could further contribute to a possible upgrade.

CESP's ratings could be downgraded if there is a significant deterioration in its cash generation so that CFO Pre WC-to-Debt falls below 12% and Cash Flow Interest Coverage declines below 2.0x for an extended period of time. Higher contingent liabilities as well as lower indemnification amounts (on a present value basis) could also worsen the Company's credit metrics, and therefore contribute to a possible downgrade.

The principal methodology used in this rating was Unregulated Utilities and Power Companies published in August 2009 and the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

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

Please see ratings tab on the issuer/entity page on www.moodys.com 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 for further information.

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

Jose Soares
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 revises the outlook of CESP to positive; affirms existing ratings
No Related Data.
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