Correction: Fitch Rates Rede Empresas de Energia Eletrica Perpetual Notes 'B/RR4'.

CHICAGO & RIO DE JANEIRO, Brazil -- This is a correction for a message issued earlier today. It amends the issuance amount in the first paragraph.

Fitch has assigned a 'B' rating to the proposed issuance of up to USD200 million perpetual notes by Rede Empresas de Energia Eletrica S.A (Rede). The issuance has been assigned an 'RR4' Recovery Rating, indicating an expected average recovery (31%-50%) given a default and an assumed jurisdictional 'RR4' cap on instrument ratings in Brazil. Fitch currently maintains Local and Foreign Currency Issuer Default Ratings (IDRs) of 'B' and Brazilian national scale ratings of 'BBB(bra)' to Rede and its subsidiaries, Centrais Eletricas Matogrossenses S.A. (Cemat) and Centrais Eletricas do Para S.A. (Celpa). All ratings have a Stable Rating Outlook.

The notes will rank pari passu with other Rede's senior unsecured debt obligations and will be subordinated to the debt of Rede's operating companies. The perpetual bonds have no fixed final maturity but will become callable by Rede in whole after the five-year initial term ending March 2012. The proceeds of the issuance will be used to refinance existing working capital obligations at the holding level.

The rating is supported by the company's market position as an important player in the electric distribution segment in Brazil and the expected strengthening of credit protection measures of the group over the next few years supported by continued growth in operational results and cash flow and a reduction of annual debt service via lower-financing-cost debt. The rating also reflects the relatively high leverage of the group when compared to other electricity companies in the Brazilian market, as well as the regulatory risks inherent in the Brazilian power sector.

Rede's credit profile is underpinned by its portfolio of eight distribution companies, and, within this, by Centrais Eletricas Matogrossenses S.A. (Cemat) and Centrais Eletricas do Para S.A. (Celpa), which roughly accounted for 59.3% (or BRL536.6 million) of Rede's 2006 consolidated EBITDA. Rede's business fundamentals are supported by the natural monopoly nature of the distribution and by the market regulation. The distributors operate are required to contract 100% of their expected energy demand and the sector's new model allows for the pass-through of all noncontrollable costs for distribution companies. Although regulatory risks remain an ongoing credit concern, the current electric energy industry model is generally positive and should support growth and stability in the sector.

Rede benefits from broad, diversified and stable customer bases. Many of the company's service areas show an average consumption growth that has exceeded the national average over the past five years. Rede's distribution revenues grew 12.6% in 2006. Future improvement in operating cash flow should also benefit from adequate tariff adjustments, improving operating efficiencies and a more favorable economic environment.

The company also participates in the electricity generation segment through two hydroelectric generation companies of an aggregate installed capacity of 529.3 MW, as well as several small thermoelectric generation units with an additional installed capacity of 127.6 MW. This segment represented about 14.8% (or BRL133.8 million) of 2006 consolidated EBITDA. As required by the New Electricity Sector Law of 2004, the company engaged into a corporate structure reorganization process, which ultimately resulted in the incorporation of operating assets (previously directly owned by Rede's parent company) into Rede in November 2006 and the divestment of twenty unleveraged small hydroelectric companies (SHCs) in the last quarter of 2006. During the first nine months of 2006 these SHCs reported an EBITDA of BRL56.1 million. Sale proceeds of about BRL103 million (net of taxes and social contributions) were applied to corporate general purposes. Existing remaining generation assets should continue to provide the company with positive cash flows reflecting highly contracted positions and regulated offtake market. Rede's strategy does not contemplate further investments in utility generation assets in the short term.

Despite a leverage increase in 2006, Rede's debt and cash flow levels remain consistent with the rating category. Rede's consolidated leverage, as measured by adjusted total debt-to-EBITDA, raised to 5.2 times (x) at December 2006 from 3.9x at the end of the fiscal year of 2005. Nonetheless, the long term nature of new debt obligations in 2006 helped improved Rede's maturities profile through amortization terms more commensurate with operating cash flows.

Adjusted consolidated debt reduction effort by Rede was mainly limited by the company's capital expenditure plans, a recent tax renegotiation, and the corporate structure reorganization, basically reflecting Inter-American Development Bank (IDB) loans to Celpa (USD100 million) and Cemat (USD79.5 million) to finance expansion and updating the distribution grid, a tax renegotiation program -PAEX- (BRL1,134.9 million at December), and debt assumptions and transfers of operating assets as part of the aforementioned corporate structure reorganization (BRL740 million outstanding at 2006 year-end). Other proceeds from refinancing transactions, namely, a fund for the securitizations of receivables (FIDC, BRL110.1 million of original amount) and Celpa and Cemat's USD100 million notes units also prolonged debt maturities and reduced refinancing risks. Finally, the perpetual notes issuance will extend improve the holding company's debt service profile to more appropriate levels for its cash flows/dividends.

Further efforts of improving debt maturity profile along 2007 are expected as the company still shows concentration of debt amortizations in 2008. The company has stated its intention to launch an initial public offering next year, which could further improve the credit quality of Rede and its subsidiaries, as a large part of these resources may be used for debt reduction.

Rede is one of the largest distribution groups in Brazil, serving approximately 3 million customers in about 30% of the national territory, and distributing over 13,081 GWh of electricity. The group holds eight operational assets in the distribution segment and a small portfolio in generation assets.

Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.

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