Fitch Upgrades Eletropaulo to 'BB-'/'A(bra)'; Outlook Stable.

CHICAGO & RIO DE JANEIRO, Brazil -- Fitch Ratings has upgraded Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A.'s (Eletropaulo) local and foreign currency issuer default ratings (IDRs) and the company's five-year USD$200 million bond issuance to 'BB-' from 'B+'. In addition, Fitch has upgraded Eletropaulo's national long-term rating to 'A(bra)' from 'BBB+(bra)' and its eighth and ninth debentures issuances, as well as its bank credit facility, Cedula de Credito Bancario (CCB), of BRL300 million. The Rating Outlook for all corporate ratings is Stable.

The rating action reflects the company's improving financial profile, strong internal cash flow generation; moderate regulatory risk and favorable economic conditions. Eletropaulo has benefited by its growing free cash flow, which has allowed the company to reduce leverage and improve its financial flexibility. The company's debt profile has also shown improvement due to lower financing costs and the extension of debt maturities. Further, cash flow is expected to increase over the next two years as Eletropaulo extends the funding of its pension obligations with Fundacao CESP. Pension fund obligations are approximately BRL2.2 billion and represent 45% of total debt at June 2006. Eletropaulo obtained an extension of payment terms to 2022 from 2008 and 2017, under the 2 existing agreements with Fundacao Cesp, which will reduce payments by approximately BRL600 million until December 2008. Eletropaulo's indirect controller, Brasiliana Energia S.A. (Brasiliana Energia), reduced debt by approximately US$600 million through the sale of Eletropaulo's shares held by AES Transgas Empreendimentos S.A., which should also increase financial flexibility, decrease pressure to pay dividends and allow better access to new credit lines.

Eletropaulo's financial profile is consistent with the new rating category with low leverage and strong interest expenses coverage. Financial leverage as measured by total debt to LTM adjusted EBITDA was 2.3 times (x) at June 30, 2006 and 2.6x in year-end 2005. On an adjusted basis, excluding extraordinary and non recurring items, Eletropaulo reported an EBITDA of BRL2.1 billion for the 12 month period ended June 30, 2006 compared with BRL1.9 billion for year end 2005 and BRL1.7 billion for 2004.

Projected operating cash flow is expected to be sufficient to meet scheduled debt-service payments and capital expenditures over the next few years. Debt issuances during the past two years has lengthened the average life of the company's debt and reduced financing costs. Going forward, the company is expected to maintain a balanced capital structure consistent with a total debt-to-adjusted EBITDA ratio between 2.5x and 3.0x. Credit-protection measures should continue to strengthen over the next year, supported by growth in operating income and cash flow, an amortizing debt structure, as well as lower financing cost, improved efficiencies and a more favorable economic environment.

Regulatory risk continues to moderate. In 2004, Brazil approved a new electric energy industry model that has provided a degree of certainty with respect to tariff adjustments and stabilized business risk. Over the last three years, the company has received tariff adjustments sufficient to maintain satisfactory cash flow generation. Revenues and adjusted EBITDA were supported by an 18.6% average tariff increase in July 2004 and 2.1% increase in July 2005. Revenue and adjusted EBITDA are expected to improve somewhat over the next year due to an 11.5% tariff adjustment in July 2006. Eletropaulo's electric distribution concession lies in a high income service area, which should benefit from an improving economic environment. Regulation requires distributors to contract 100% of their forecasted energy demand which are passed-through to the end-users. Regulation limits energy cost pass-though to 103% of forecasted demand, which somewhat adds to business risk. New rules also contemplate the pass-through of non-manageable costs, which permits reduction of operational risks and better predictability in the operational activity of energy distribution.

Eletropaulo is the largest electricity distributor in Brazil, in terms of revenues and volumes sold (31.634 GWh in 2005). The company is indirectly owned by Brasiliana Energia, which is owned, in turn, by AES Group and BNDES. Brasiliana Energia owns 76.4% of Eletropaulo's voting shares and 15.5% of its preferred shares.

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