S&P Assigns 'brA' Rating to Energisa.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire

June 19, 2000--Standard & Poor's today assigned its 'brA' rating to Energisa S.A. The outlook is stable.

Energisa is a holding company for two electric distribution utilities in northeastern Brazil: Empresa Energetica de Sergipe, S.A., (Energipe) and Companhia Energetica da Borborema (CELB). Companhia Forca e Luz Cataguazes-Leopoldina (CFLCL), which operates distribution utilities in the southeast of Brazil, in turn, is the holding company for Energisa. Given the ownership, operational relationships, and similarities in credit profiles of the utilities, Energisa's and Energipe's creditworthiness reflect that of CFLCL on a consolidated basis.

Brazil's economy is relatively volatile. In addition, distribution companies face regulatory risk since substantial and important rules in the electric sector are not yet final or tested. These operational uncertainties inevitably limit the ratings of Energisa and those of all Brazilian distribution utilities. Management's intent is to purchase other utilities in the northeast and provide cable and television services could increase financial risk. Other risks Energisa and Energipe face are high industrial customer concentrations and the fact that the service area is considerably poorer than much of the rest of Brazil.

These concerns are offset by a service area that is experiencing rapid growth. In addition, Energisa's debt burden is low and entirely in the local currency, thus mitigating foreign exchange risk. Energisa also benefits from the presence of Alliant Energy Corp. (single-'A'-plus/Negative/'A-1'), a U.S. company that has a 46% direct voting stake. Finally, management is strong and experienced: CELB, purchased in 1999, is the third acquisition of CFLCL. Management is accustomed to reducing the work force, managing relations with shareholders in the public sector, and changing company cultures. These skills will be important in the eventual acquisition of another utility.

CFLCL's finances, on a consolidated basis, are recovering after a R$365 million infusion from Alliant, which replaced CMS as a partner in January 2000. CFLCL over-leveraged itself when it acquired Energipe in 1997. CFLCL spent much of the cash on early redemption of its fifth series of debentures. Funds from operations (FFO) to interest coverage was very low, at close to 1 times (x), in 1999 and 2000. Projections over the next two years are for this ratio to climb to more than 3x. FFO as a percent of average total debt in 2000 is expected to be nearly zero, but improve to more than 20% by 2002, as debt incurred to purchase Energipe and CELB is paid off. Standard & Poor's considers a 20% coverage level to be average to slightly below average. Pretax interest coverage is projected to rise from around 1.5x in 2000, to more than 3.5x by 2002. Debt to total capitalization since the early redemption of the fifth series of debentures in January 2000 has averaged a relatively conservative 40%. The company also has a considerable amount of cash on hand, projected at more than 500 days for 2000. At least some of this cash will probably be used for an acquisition.

OUTLOOK: STABLE

Standard & Poor's expects that the impact from forays into cable TV and other communications ventures will not materially erode consolidated financial performance. Management has also expressed its interest in purchasing another distribution utility in the northeast. While the rating reflects expectations of a purchase, Standard & Poor's anticipates CFLCL and Alliant would pay for the acquisition through a combination of cash and concessionary loans, Standard & Poor's said. -- CreditWire