TEXT-S&P affirms Empresa Nacional de Electricidad Chile at 'BBB+'
Overview -- Chile-based power generating company Empresa Nacional de Electricidad's overall operating and financial performance remained sound, in line with our expectations, despite softer margins following the drought season in Chile. -- We are affirming our 'BBB+' corporate credit and senior unsecured ratings on the company. -- We expect the company will continue benefiting from favorable prospects for electricity demand in the region and from conservative commercial strategy resulting in strong cash flow generation and sound credit metrics in the intermediate term. Rating Action On May 2, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' ratings on Empresa Nacional de Electricidad S.A. (Endesa Chile). The outlook is stable. Today's rating action is part of our regular review. Rationale The 'BBB+' ratings on Endesa Chile continue to reflect our assessment of its business risk profile as satisfactory and its financial risk profile as modest. Endesa Chile's leading market position in the Chilean Interconnected Central System (SIC) and a favorable regulatory and pricing environment for power generation in Chile support its satisfactory business profile. However, those factors are partially offset by its exposure to hydrology risk and investments in operations in lower-rated sovereigns, such as Argentina, Brazil, Colombia, and Peru, which provide some diversity, but expose the company to greater economic volatility. The company's modest financial risk profile is based on its good cash flow generation, moderate consolidated debt levels, good credit metrics, and strong liquidity and financial flexibility. The company's commercial strategy in Chile with sale contracts indexed prices partially mitigates the inherent volatility of its profitability and cash flow generation. We expect Endesa Chile will maintain its sound cash generation and cash flow protection metrics mainly as a result of favorable fundamentals for power demand in the region. We also expect less cash flow volatility in Chile due to the "Short Law II," which applies indexed power prices. Assuming a conservative annual sales growth of about 5% on average and normal hydrological conditions, we expect Endesa Chile to generate an EBITDA of $2.0 billion - $2.1 billion in the next two years (excluding its Brazilian operations). Consolidated debt is expected to decrease to $3.5 billion in the same period. In line with this scenario, we project consolidated funds from operations (FFO) to debt, FFO interest coverage, and debt to EBITDA ratios of at least 40%, 6x, and 1.7x, respectively. On an individual basis, we expect the company's operations in Chile to generate about $1 billion annually before interest payments. These funds, along with $200 million - $300 million received from subsidiaries (through interest payments, dividends, or capital reductions) should allow the company to cover less than $200 million of annual interest payments for the $2.0 billion debt in Chile, pay taxes, carry out annual capital expenditures of $100 million - $160 million, and distribute dividends with no significant increases in debt during the next two fiscal years. Endesa Chile is a leading power generator in Latin America through its ownership of about 14,800 megawatts of installed capacity (which includes its Brazilian operations) that generates 55,000 gigawatt-hours (GWh) - 60,000 GWh per year. Endesa Chile is 60% owned by Enersis S.A. (BBB+/Stable/--), a Chilean holding company with investments mainly in power generation and electricity distribution in Latin America. Enersis, in turn, is 60.6% owned by Spanish utility Endesa S.A. (BBB+/Stable/A-2). Liquidity We consider Endesa Chile's liquidity as strong. As of Dec. 31, 2011, the company had $812 million in consolidated cash reserves, which significantly exceeds its short-term debt of $450 million. In addition, the company had about $487 million of committed unused bank lines, more than $1.1 billion of noncommitted, but authorized, revolving lines, and very good access to the markets that enhance the company's financial flexibility. We also incorporate in our analysis the following factors: -- According to our base case, sources of liquidity will exceed uses by more than 1.5x during the next 24 months; -- Sources-to-uses ratio will still be positive and covenant headroom sufficient, even if EBITDA were to decline 30%; and -- Endesa Chile has a relatively good access to credit markets and its prudent financial risk management strengthens its liquidity. The expected FFO in the $2 billion area in the intermediate term, coupled with the company's cash reserves and committed bank lines, will allow it to maintain capex of about $500 million, its working capital needs, and the dividend payout. Our base case assumptions don't incorporate further increase in debt, although we expect the company will be able to refinance the majority of its bank loans. According to the information provided by the company, as of Dec. 31, 2011, Endesa Chile was in compliance with, and had adequate room under, its existing covenants. Main covenants include debt to EBITDA ratio, interest coverage ratio, and minimum net worth. Outlook The stable outlook reflects our expectation of the company's continued solid credit metrics and free cash flow generation to serve its debt, as a result of favorable fundamentals for electricity demand in the region, and its strong competitive position in Chile and other countries in the region. Rating upside is unlikely in the intermediate term, and it's currently constrained by ownership factors and country risk exposures. The ratings could be pressured by changes in the financial policy that could result in a significant weakening in its financial and liquidity condition, such as due to severe prolonged droughts. Additionally, given the importance of Endesa Chile to its ultimate parent, Endesa S.A., its deteriorating credit quality could lead us to take action on its Chilean subsidiaries. Related Criteria And Research -- Methodology and Assumptions: Standard and Poor's Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Business And Financial Risks In The Investor-Owned Utilities Industry, Nov. 26, 2008 -- 2008 Corporate Ratings Criteria, April 15, 2008 Ratings List Ratings Affirmed Empresa Nacional de Electricidad S.A. Chile Corporate Credit Rating BBB+/Stable/-- Senior Unsecured BBB+ Endesa Chile Overseas Co. Senior Unsecured BBB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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