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TEXT - S&P revises Eletropaulo outlook to stable
November 13, 2012 / 4:35 PM / 5 years ago

TEXT - S&P revises Eletropaulo outlook to stable

Overview
     -- Brazilian electric utility Eletropaulo reported
weaker-than-expected credit metrics and incurred additional debt to fund
investments while 
implementing the third tariff review cycle.
     -- However, service quality indicators improved and now are in line with 
regulatory standards.
     -- We revised the outlook to stable from positive and affirmed the 'BB+' 
rating on the company.


Rating Action
On Nov. 13, 2012, Standard & Poor's Ratings Services revised its outlook on 
Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo) to 
stable from positive. At the same time, we affirmed our 'BB+' credit rating on 
the company.


Rationale
The outlook revision reflects the company's weaker-than-expected credit 
metrics. Although Eletropaulo's lower cash-flow generation, due to the 
third-cycle tariff reset in July 2012, was in line with our expectations, 
higher debt pressured its credit metrics. Despite the active liability 
management and improving debt maturity profile, the company funded the higher 
capital expenditures with debt. The ratings reflect our view of the company's 
"satisfactory" business risk profile and "significant" financial risk profile. 

The company's "satisfactory" business risk profile (as defined by our 
criteria) reflects the benefits from an exclusive concession to distribute 
electricity in the Sao Paulo metropolitan area. It also reflects its large 
customer base, with residential and commercial segments representing about 65% 
of the company's revenues. These segments tend to be more resilient during an 
economic slowdown, and we expect electricity demand to be greater than 
national GDP growth. Eletropaulo's total electricity losses gradually 
decreased to 10.4% as of Sept. 30, 2012, from 13% in 2007. In addition, the 
company's quality service ratios improved, particularly its outage duration, 
which is now in line with the regulatory standards. The impact of the third 
tariff review cycle is in line with our previous expectations, which reduced 
the company's EBITDA by more than 35%; however, the restructuring cost put 
further pressure on the company's operating results.

In our view, Eletropaulo's cash-flow metrics will be more pressured in the 
next few years than we have previously expected amid lower operating margins 
from 2012 on. We revised our base-case scenario, which now incorporates 
Brazil's slower economic growth for the next 12 months and funds from 
operations (FFO) would be somewhat around R$900 million. We believe that the 
company's credit metrics will remain in line with the rating, with total 
adjusted debt to EBITDA of around 4.0x and FFO to total adjusted debt of less 
than 30%, compared with our previous expectations of 3.0x and more than 35%, 
respectively.  

As of September 2012, Eletropaulo's adjusted total debt totaled R$4.2 billion, 
including adjustments for R$1.2 billion in pension fund obligations, which 
require Eletropaulo to pay about R$160 million annually. We consider the 
company's foreign currency debt exposure as low.

Liquidity 
We view Eletropaulo's liquidity as "strong," reflecting the company's high 
level of cash holdings, which it will use for its modest amortization 
requirements. We expect Eletropaulo to report cash sources (cash reserves and 
FFO) to exceed cash uses (debt amortization, capital expenditures, and 
dividend payment) by almost 2.0x in 2012 and 2013. As of Sept. 30, 2012, the 
company had R$930 million of cash reserves, which was sufficient to cover its 
short-term maturities of R$386 million.

Outlook 
The stable outlook reflects our expectation that Eletropaulo will take longer 
than we expected to improve its credit metrics. We could lower the ratings if 
the company aggressively upstreams dividends or its cash flows deteriorate 
further, leading to permanently weaker credit metrics and liquidity. 
Conversely, an upgrade is possible if better-than-expected results leading to 
EBITDA of less than 3.0x and FFO to total debt of more than 40%.

Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012
     -- Methodology and Assumptions: Standard and Poor's Liquidity Descriptors 
for Global Corporate Issues, Sept. 28, 2011
     -- Corporate Criteria: Ratios and Adjustments, April 15, 2008


Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A.
 Corporate Credit Rating                BB+/Stable/--      BB+/Positive/--
 Brazilian Rating Scale                 brAA+/Stable/--    brAA+/Positive/--
 Senior Unsecured                       brAA+              
 Subordinated                           brAA

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