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Rating Action:

Moody's upgrades CESP's corporate family rating to Ba1; outlook stable

 The document has been translated in other languages

03 Dec 2010

Approximately BRL 1.5 billion of debt instruments affected

Sao Paulo, December 03, 2010 -- Moody's Investors Service (Moody's) upgraded Companhia Energetica de Sao Paulo's (CESP) corporate family rating to Ba1 from Ba2. At the same time, Moody's upgraded CESP's Baseline Credit Assessment (BCA) to 12 (mapping to Ba2) from 13 (mapping to Ba3).The outlook is stable for all ratings.

This rating action affected the following debt instruments:

- USD 1.4 billion Unsubordinated Unsecured Medium-Term Notes Program

- USD 184 million 10.25% Senior Unsecured Notes due 2011 issued under the MTN program

- USD 220 million 9.25% Senior Unsecured Notes due 2013 issued under the MTN program

- BRL 750 million 9.75% IPCA Linked Notes due 2015 issued under the MTN program

RATINGS RATIONALE

The upgrade of the issuer rating of the State of São Paulo to Baa3 from Ba2 prompted the rating action of the corporate family rating as a result of the application of Moody's GRI rating methodology. In accordance with Moody's GRI rating methodology, CESP's Ba1 corporate family rating reflects the combination of the following inputs:

- Baseline credit assessment (BCA) of 12 (mapping to a Ba2)

- High dependence

- High government support

- The Baa3 rating of the State of São Paulo, which has a stable outlook.

CESP is a Government-Related Issuer (GRI) in accordance with Moody's rating methodology entitled "The Application of Joint Default Analysis to Government-Related Issuers (GRIs)". Moody's methodology for GRIs incorporates the company's stand-alone credit risk profile or Baseline Credit Assessment (BCA) as well as the likelihood that both entities would default at the same time and the probability that the controlling shareholder would provide extraordinary support for the company's debt obligations. The Ba1 GRI rating of CESP results from the application of joint-default analysis of the company's BCA of 12, the Baa3 rating for the State of Sao Paulo, Moody's view of high dependence (the likelihood that both entities would default at the same time), and high probability of extraordinary support from the controlling shareholder.

The upgrade of CESP's BCA to 12 from 13 is based on the agency's rating methodology for Unregulated Utilities and Power Companies (published in August 2009) and largely reflects the CESP's gradual and consistent improvement of CESP's credit metrics in the past twelve months. This has largely stemmed from the company's predictable cash flows supported by its medium-term supply contracts primarily with the regulated market, an evolving regulatory environment and manageable refinancing risk given the company's continued focus on de-leveraging its balance sheet.

Despite Moody's forecast of a continuous improvement in credit metrics in the medium term, CESP's BCA rating is constrained by the potential risks associated with cash disbursements in connection with existing contingent liabilities, currency exposure and the renewal of CESP's primary concessions in 2015.

The stable outlook reflects Moody's expectation that CESP will continue to generate growing internal cash flow and further reduce debt in the next 12 to 18 months. The major downside risks for this forecast are higher than expected cash disbursements with contingent liabilities, which Moody' s forecasts should not exceed BRL 300 million per annum, or an unexpected prolonged dry season in the short term, which could cause higher expenses with the acquisition of energy in the spot market.

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

What Could Change the Rating - Up

CESP's ratings could be upgraded if there is an improvement in CESP's cash generation such that CFO Pre W/C to Debt remains above 20% and cash flow interest coverage stays above 3.6x on a sustainable basis and the uncertainties with respect to the scheduled expiration of its concessions are reduced. A further upgrade of the issuer rating of the state of São Paulo could also trigger a rating upgrade.

What Could Change the Rating - Down

CESP's ratings could be downgraded if there is a deterioration in CESP's cash generation, such that CFO Pre W/C to Debt falls below 12% and cash flow interest coverage declines below 2.0x for an extended period of time.

The last rating action for CESP was on September 28, 2009 when Moody's upgraded CESP's Baseline Credit Assessment (BCA) to 13 (mapping to Ba3) from 14 (mapping to B1) and affirmed its Ba2 corporate family rating with stable outlook.

Headquartered in Sao Paulo, Brazil, Companhia Energetica de Sao Paulo (CESP) is the country's fourth largest power generator with an installed capacity of 7,456 MW and 3,916 MW of assured energy. The government of the State of Sao Paulo is CESP's major shareholder, with 94.1% of its voting capital and 36% of its total capital. During the last twelve months ending on September 30, 2010, CESP posted net revenues of BRL 2,822 million (approximately USD 1,530 million) and net profit of BRL 29 million (approximately USD 16 million)

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 maintaining 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
Jose Soares
Vice President - Senior 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

Moody's upgrades CESP's corporate family rating to Ba1; outlook stable
No Related Data.
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