TEXT-S&P affirms E-CL SA's 'BBB-' rating
Overview -- E-CL enjoys a good cash flow generation deriving from long-term power sale contracts with solid counterparties, which allow it to maintain good credit metrics. -- We are affirming our 'BBB-' issuer credit rating on Chile-based power generator E-CL S.A. -- The stable outlook reflects our expectation that E-CL'S EBITDA will return to levels between $300 million and $350 million in 2013 and 2014 and that its total debt EBITDA ratio will remain below 3.5x even if the company carries out significant new investments. Rating Action On Nov. 9, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' issuer credit rating on Chile-based power generator E-CL S.A. The outlook remains stable. E-CL S.A. is the largest power generator in the Chilean Northern Interconnected System with a market share of around 50% in terms of installed capacity and is 52.77% indirectly owned by France-based multi-utility GDF Suez S.A. (A/Stable/A-1). Rationale Our ratings on E-CL S.A. reflect the company's "satisfactory" business risk profile and "intermediate" financial risk profile. E-CL's business risk profile mainly benefits from its strong market position in Chile's Northern Interconnected System (SING), with about 50% market share in terms of installed power generating capacity; its diversified capacity mainly among coal and natural gas fired units; its large portfolio of power sale contracts with solid counterparties; a sale pricing mechanism that allows to pass-through fuel costs to its customers; and its strong ownership. The ratings also consider the high competitive pressures from other large power generators, volatile market conditions in the SING due to potential operational disruptions in a context of high contracted sales and highly volatile fuel prices that significantly affect E-CL's operating costs, and the potential significant increase in debt levels if the company decides to carry out certain material investments like two coal-fired units of 375MW each, that would cost about $1.6 billion. We expect E-CL's credit metrics to weaken quite significantly in fiscal 2012 mainly due to a temporary mismatch between cost and sale price of a new power sale contract with Chilean electric distributor EMEL during the first 9 months of 2012. In this context, we expect EBITDA margin, debt to EBITDA, and funds from operations (FFO) to debt to decrease to about 23%, 3x, and about 25%, respectively, in fiscal 2012 compared with 29%, 1.9x, and 59.5% in 2011. However, we expect this negative effect to be eliminated as of the fourth quarter of 2012 due to E-CL's new long term supply contract of liquid natural gas (LNG), which is adjusted by according to Henry Hub, which is one of the indexation factors for the new power sale contract with EMEL. In that context, we expect EBITDA margin to recover to about 26% to 27% and debt to EBITDA to remain under 3.5x in 2013-2014, even if the company decides to carry out the abovementioned significant new investments. GDF Suez (A/Stable/A-1) indirectly owns 52.77% of E-CL. The rest of the capital stock is mostly in hands of Chilean pension funds and other institutional investors. Liquidity We view E-CL's liquidity as adequate (per our criteria). Relevant aspects of our assessment of the company's liquidity profile include the following: -- We expect that sources of liquidity (including FFO and cash balances) over the next two years will exceed uses by at least 1.2x. -- EC-L does not face relevant debt maturities in the 2013-2014 period. -- We expect that liquidity sources will continue to exceed uses, even if EBITDA were to decline by 20%. -- The company has good access to credit markets. -- The company currently does not have any financial covenants. As of Sept. 30, 2012, E-CL had cash holdings of $200 million compared with $67 million in short-term debt. We expect E-CL to maintain cash holdings of at least $100 million and to continue enjoying a good financial flexibility. However, the company could decide to develop a large investment plan that could somewhat hurt its free operating cash flow during the peak investment period. In that case of significant higher investments, we expect debt to EBITDA levels to remain below 3.5x, and that E-CL will further strengthen its liquidity though a higher cash position or committed bank lines, and potentially reduce dividends. Outlook The stable outlook reflects E-CL's strong market position and our expectation that after the weakening in fiscal 2012 EBITDA will return to levels between $300 million and $350 million in 2013 and 2014 and total debt to EBITDA will remain under 3.5x even if the company decides to carry out significant new investments. The rating also incorporates cash reserves of at least $100 million and the company's good financial flexibility. The ratings could be raised if there are more certainties regarding the potential materialization of significant debt-funded investments for the 2013-2017 period and if projected consolidated debt to EBITDA is between 2x-2.5x. The ratings could come under pressure if performance in the company's more efficient units deteriorates and/or if the company assumes higher-than-projected debt levels that lead to debt to EBITDA of greater than 3.5x, while presenting weaker-than-expected liquidity and financial flexibility. Related Criteria And Research -- Standard & Poor's Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Ratings Criteria, April 15, 2008 Ratings List Ratings Affirmed E-CL S.A. Corporate Credit Rating BBB-/Stable/-- E-CL S.A. Senior Secured BBB- 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.