TEXT-S&P affirms Empresa Nacional de Electricidad Chile at 'BBB+'

Wed May 2, 2012 4:08pm EDT

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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