News Column

Fitch Affirms Endesa Chile's IDRs at 'BBB+/AA(cl)'; Stable Outlook

August 6, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Empresa Nacional de Electricidad S.A.'s (Endesa Chile) at 'BBB+' and its long-term national scale rating at 'AA (cl)'. In addition, Fitch has affirmed Endesa-Chile's short-term national scale rating at 'N1+/AA(cl)' These rating actions affect, as of June 2014, approximately USD917 million of outstanding Yankee bonds and USD529 million of domestic bonds. The Rating Outlook is Stable.

Fitch also affirmed Endesa's national Equity Rating at 'Primera Clase Nivel 1 (cl)'. The rating is based on the company's significant market capitalization in comparison with peers in the stock exchange. As of July 2014, shares of Endesa Chile demonstrate solid liquidity and are 100% present at the Santiago Stock Exchange. The shares' average trading volume for the July 2014 rolling 12 month period was USD5.3 million, which is down year-over-year (YoY). Endesa's free float is 40.02%, as the main shareholder, Enersis, owns 59.98% of the total shares of Endesa-Chile.

KEY RATING DRIVERS

Endesa Chile's ratings reflect a moderate-risk business profile underpinned by the company's conservative commercial strategy and geographic diversification, operations in constructive regulatory environments, and strong financial metrics. Endesa Chile's ratings are aligned with those of parent company Enersis S.A. (Fitch IDR of 'BBB+', Outlook Stable) in light of their strong legal, operational and strategic ties. The Stable Outlook is driven by Endesa Chile's adequate liquidity profile and credit metrics.

Credit risks associated with the company are manageable and include possible pressure from the shareholder Enel S.p.a. (IDR of 'BBB+', Outlook Stable) to increase dividends. The company is also exposed to possible environmental and/or political issues that could result in cost overruns or modifications of projects under construction. Endesa Chile could also face regulatory uncertainties in Argentina. This is mitigated by the fact that Argentina only represents 7% of 1H'14 EBITDA and Endesa Chile does not face cross default risk from these operations.

Conservative Commercial Policy: Endesa Chile's conservative commercial policy is a key strength to help reduce the company's exposure to hydrology risk, as hydroelectric capacity represented 57% of its generation matrix as of June 2014. The company's commercial policies limit the contracted volume to Endesa Chile's efficient generation capacity under different scenarios. Nevertheless, in a situation of severe drought, the company may need to buy energy in the spot market to fulfill its contracts. Geographic diversification throughout South America provides a natural hedge against different regulations, economic downturns, and weather conditions.

The company has a strong competitive position in Chile which represented 37% of 2013 consolidated EBITDA. In Chile, the company's exposure to commodity fuel price risk is mitigated by contracts that include price indexation mechanisms that recognize a significant portion of fuel price variations. Also, the company has access to competitive natural gas from its 20% ownership in the LNG Quintero S.A. (IDR of 'BBB+', Outlook Stable) liquefied natural gas (LNG) regasification facility. Access to lower cost natural gas favorably positions the company against its competitors that use higher cost fuels. The company's power plants San Isidro I and II have been able to operate continuously with such gas during the 2010-2013 unusually prolonged drought in Chile.

Bocamina II Stoppage Poses Manageable Risk: The Bocamina II coal plant began its commercial operations in Chile in October 2012, adding 350 megawatts (MWs) of thermal power generation after a delay of over one year in its start-up. In December 2013, a Chilean appeals court ordered the suspension of operations at this plant due to environmental issues. So far, Endesa Chile's appeals to re-start operations have been unsuccessful, and the plant has remained idle since December. In addition, the plant's sister facility, Bocamina I, was also idled for about 10 days in late-January 2014.

Endesa Chile's estimated total incremental cost from this stoppage at Bocamina II, due to the cost of having to pay spot prices to fulfill energy contracts, averaged USD0.8 million-USD1.2 million per day of lower contribution margin in the first half of the year. In the second half of the year, Bocamina II is less relevant to Endesa Chile's operations due to the melting season in Chile increasing the hydro mix. Furthermore, spot energy prices in the second half of the year tend to be lower also due to higher water availability in the system.

In a worst-case scenario, which would assume the plant remains out of operation for the entire year, Fitch is conservatively estimating a USD250 million hit to EBITDA, which is the equivalent of 12% of adjusted EBITDA reported during 2013. Even in this scenario, Fitch believes that the company will be able to maintain sound credit metrics with total debt to EBITDA around 2.3x, assuming EBITDA generation of USD1.8 billion for the year as the Bocamina II shortfall will be offset by the consolidation of the Gas Atacama acquisition and stronger EBITDA generation in both Chile and Colombia. There is potential upside to Fitch's estimates if spot prices in 2H14 decline further than expected, if the hydro generation mix increases significantly year-over-year, and if Bocamina II restarts operations before the end of the year.

Moderate Medium-Term Expansion Program: Endesa Chile's main project under construction is El Quimbo, a 400MW hydroelectric plant in Colombia. With a total investment of USD1.1 billion, Quimbo is expected to begin operations in the first half of 2015. Endesa Chile continues to study several expansion projects in Chile, Colombia and Peru including the Taltal conversion to combined cycle (120MW), Salaco repowering project (145MW), Curibamba (188MW), Punta Alcalde (740MW), and Neltume (490MW). Endesa Chile had been conducting studies to construct the Hydroaysen hydro power plant which would have added 2,750MW of capacity in Chile; however, the project was dealt a setback when its environmental permits were rejected by the government on July 15, 2014.

In late March/early April 2014, Endesa Chile's Board of Directors approved two notable investments. On March 31, the board approved the acquisition of a 50% stake in GasAtacama from Southern Cross Latin American for USD309 million. Endesa Chile previously owned 48.1% of this asset with Enersis owning the remaining 1.9%. Through this acquisition, which closed at the end of April 2014, Endesa Chile gained full control of the asset starting May 2014. On April 1, Endesa's board approved a USD662 million investment to construct a 150MW hydroelectric plant in the Maule region called Los Condores. This plant, which had previously been under study, is expected to be operational by the end of 2018.

In Fitch's view, the company's investments should not have a material negative impact on the company's cash flows in the short to medium term, and will prove accretive to cash flow in the long term. Fitch expects that future capacity additions should not require significant additional indebtedness as free cash flow is forecast to remain positive during the next four years, even assuming annual capex would remain above the USD600 million spent in 2013.

Credit Metrics Expected to Remain Strong: Endesa maintains a sound credit profile supported by stable EBITDA generation and a moderating leverage level. As of Dec. 31, 2013, interest coverage ratio (adjusted EBITDA-to-interest) stood at 6.1x (versus 4.8x in 2012), while leverage measured as total debt-to-adjusted EBITDA was 1.9x (versus 2.3x) and net debt-to-adjusted EBITDA was 1.5x (versus 2x).

For the full-year 2013, the company's adjusted EBITDA was USD2.1 billion, and even despite the Bocamina II stoppage, Fitch expects EBITDA of USD1.8 billion in 2014 with potential upside if the company is able to re-start operations at the facility before year-end. Long term, Fitch is conservatively estimating for EBITDA to reach the mid-USD2.5 billion level as new projects, such as El Quimbo, come on-line. Even taking the Bocamina II stoppage into consideration, Fitch expects Endesa to maintain interest coverage above 6x and a net leverage ratio at 2.0x or below, between 2014-2017.

Sound Liquidity and Manageable Debt Maturity Profile: Endesa Chile's credit profile is supported by ample consolidated liquidity as the company had USD441 million of cash as of June 2014 and access to USD495 million of secured committed revolving credit lines and US344 million of non-committed credit lines; that compares positively to short-term debt of USD840 million. As of June 2014, total debt was USD4.4 billion, and, going forward, debt maturities are manageable with USD284 million due in 2015 and USD202 million due in 2016.

RATING SENSITIVITIES

Endesa Chile's ratings could be negatively affected by a combination of the following: a change in the company's commercial policy that results in an imbalanced long-term contractual position; and/or a material and sustained deterioration of the company's credit metrics reflected in a debt-to-EBITDA ratio greater than 3x and EBITDA-to-interest coverage below 4x; and/or pressure from shareholders that could result in a significant increase in dividend payments.

A positive rating action would be considered after material improvements in credit metrics that could be sustained over the long term and a substantial reduction in debt levels. Sustained gross debt to adjusted EBITDA ratios in the 1.5x level would be viewed positively.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May. 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=845995

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

+1-212-612-7895

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Paula Garcia

Director

+562-2-4993316

or

Committee Chairperson

Lucas Aristizabal

Senior Director

+1-312-368-3260

or

Media Relations

Elizabeth Fogerty, New York, Tel: +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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