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Fitch Affirms Transelec's IDRs at 'BBB-' and National Scale Rtg at 'A+(cl)'; Outlook Stable

February 3, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings has affirmed Transelec S.A.'s ( Transelec ) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-', as well as the company's USD300 million of international bonds outstanding at 'BBB-'. Fitch has also affirmed Transelec's long-term national scale rating and senior unsecured debt rating at 'A+(cl)'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release. KEY RATING DRIVERS Low Business Risk Profile: The investment grade ratings of Transelec reflect the company's low business risk profile stemming from its exceptionally stable and predictable cash flow generation, characteristic of electric transmission utility companies, and its natural monopoly condition. The regulatory environment in Chile is considered solid and stable, and provides for certainty in the determination of regulated transmission revenues and returns on future investments. Operating Performance Remains Stable: The company generates stable and predictable cash flows from operations due to the nature of its business and the strengths of the regulatory environment. EBITDA has increased over the past two years to approximately USD360 million , mainly as a result of the organic expansion of the transmission facilities and, to a lesser extent, additional engineering services provided to third parties. EBITDA margin remains high at close to 80%. Tariff resets approved in 2010 (lasting until 2014) did not have a material impact on the company's revenues, and expectations are that future tariff resets will remain on this path. Leverage Metrics Remain High : Transelec's leverage is considered high for its rating category, although this is mitigated by the company's stable cash flow stream. Leverage measured as debt-to-EBITDA rose to 6.6x as of September 2013 (LTM), resulting from two large debt issuances, in the domestic and international markets, largely used for debt refinancing and to fund the company's significant capex and high dividend policy of the last few years. The company's financial strategy is aimed at maintaining leverage measured as debt-to-EBITDA in between 5.7x and 6.5x in the long term. Fitch expects the leverage ratio to show gradual reductions and achieve 6.0x during 2016, which is a level that is more adequate for its rating category. Interest coverage ratio (funds from operations-to-interest) has remained stable at close to 4.0x. Extraordinary Dividend Payouts Ensure High Leverage: Transelec has a dividend policy of distributing 100% of net profits (approximately USD100 million annually.) However, the payout rate has been higher in the last few years due to the payment of extraordinary dividends in 2012 and 2013, with total payments of USD222 million and USD250 million , respectively. Fitch expects that in the future, and in the event the company accumulates substantial amounts of cash, it could repeat such a payment, through eventual dividends, capital reductions, inter-company loans or other mechanisms that allow the payment of such cash to its shareholders. Nonetheless, based on Transelec's solid cash generation capacity, Fitch estimates that the company should be able to maintain adequate levels of indebtedness, profitability and liquidity. Adequate Liquidity and Debt Market Access Favor Refi and Funding Activities: Transelec's liquidity position is adequate with a cash balance of USD360.8 million as of Sept. 30, 2013 , of which USD170 million was generated from the sale and financing of the Caserones project, and the rest by operating cash flow and debt financing. In addition, the company's liquidity is complemented by USD250 million available from a revolving credit facility and a six-month USD50 million debt service reserve account (DSRA) fully funded by the shareholders. Finally, the company has proven access to both domestic and international capital and financial markets, being the largest individual local bond issuer in Chile . Adequate Debt Profile after July Bond Issuance: Following the refinancing of Transelec's short-term debt in May and July 2013 , the average life of company's debt was extended to 12.1 years from 9.4 years. Debt maturities are manageable at USD288 million in 2014, USD116 million in 2015 and USD272 million in 2016. Transelec has historically shown a positive track record of accessing debt in the local and international debt capital markets. In May 2013 , the company carried out a local bond issuance for UF3.1 million ( USD151 million ), with a 29.5-year term, and in July it issued international bonds for USD300 million and a 10-year term, using such proceeds mostly for short-term debt refinancing. Non-organic Growth to Slow in 2014: In December 2012 , the company announced two separate acquisitions: 1) Transelec Norte, a subsidiary of Transelec , announced the acquisition of Inversiones Electricas Transam Chile Limitada (Transam) for the amount of USD43.6 million ; 2) through a private bid offering made by E-Cl in December 2012 , Transelec acquired a 173 km transmission line located in the Northern Interconnected System (SING) for USD24 million . However, acquisition activity has slowed down in 2013 and is not expected to pick-up in 2014. In addition, the company's capex is expected to remain in line with its historical track record. RATING SENSITIVITY Future developments that may, individually or collectively, lead to negative rating action include: the maintenance of leverage ratio at peak levels (6.5x); a change in the company's strategy that becomes more aggressive in terms of leverage, dividends, and capital expenditures; movements beyond the expected debt levels, liquidity, and operational earnings; or a change in the regulatory framework. With debt-to-EBITDA between 5.7x and 6.5x, Fitch believes Transelec has modest headroom in the 'BBB-' category. Given the company's high leverage levels, it is not envisioned that a positive rating action could take place. Although unlikely in the near term given the company's capital structure profile, a positive rating action could be considered if the company decreases its leverage position below 5.0x. Fitch affirms the following ratings: -- Foreign Currency IDR at 'BBB-'; -- Local Currency IDR at 'BBB-'; -- Senior unsecured international bonds at 'BBB-'; -- National scale rating at 'A+(cl)'; -- Local bonds, series C, D, E, F, H, I, K, L, M, N, O, P and Q at 'A+(cl)'. -- Local bond programs No. 480, 481, 598, 599, 743 and 744 at 'A+(cl)'. Additional information is available at ' www.fitchratings.com '. Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819234 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst Xavier Olave Associate Director Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 +1 212 612 7895 or Secondary Analyst Paula Garcia-Uriburu Director +56 2 2499 3316 or Committee Chairperson Rina Jarufe Senior Director +56 2 2499 3310 or Media Relations: Jaqueline Carvalho , Rio de Janeiro , +55 21 4503 2623 Email: jaqueline.carvalho@fitchratings.com Elizabeth Fogerty , New York , +1 212-908-0526 Email: elizabeth.fogerty@fitchratings.com Source: Fitch Ratings


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