OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Engie Energia Chile S. A. (formerly known as E. CL) at 'BBB', and its Long-Term National Scale rating at 'A+(cl)'. Fitch has also affirmed the company's long-term international bond ratings at 'BBB'. The Rating Outlook is Stable. Simultaneously, Fitch has assigned National Equity ratings at 'Primera Clase Nivel 2'.

KEY RATING DRIVERS

Engie Energia Chile S. A.'s (E. CL) ratings reflect the company's sound financial profile, strong contractual position, competitive cost structure, and diversified generation matrix. The company's ratings also reflect its improved financial metrics and expectations that it will continue strengthening its financial profile once the expansion of the Mejillones terminal (IEM project) and transmission project (TEN) are finalized and the new contracts in the Sistema Interconectado Central (SIC) commence during 2018.

E. CL entered a high capital investment period with strong credit metrics and its rating is expected to be unaffected during the next expansion cycle, when its leverage is expected to increase momentarily. E. CL expects to fund its approximately USD1.4 billion capex plan over the next three years with internal cash flow generation, cash on hand and approximately USD200 million of incremental debt. The ratings consider our assumption that the financing of the company's capex participation on the TEN project will be realized on a non-recourse basis. Under this scenario, Fitch is projecting leverage, as measured by Total Debt/EBITDA, to be near or below 3.5x at the peak of the capex needs and then to significantly improve starting in 2019 once the contracts in the SIC commence at improved prices and the IEM project is finalized.

To a lesser degree E. CL's ratings reflect the implicit support provided by its main shareholder, Engie (formerly known as GDF Suez). Engie, one of the largest power companies in the world, owns a 52.76% equity share in E. CL and has historically supported the company either through intercompany loans or equity contributions. Credit risks associated with E. CL include construction execution risk as it embarks on a large expansion program, and the possibility that the incremental leverage resulting from this investment program is sustained.

PREDICTABLE OPERATING CASH FLOW: E. CL benefits from long-term power purchase agreements (PPAs) with financially strong counterparties, primarily in the mining sector. E. CL's customer base is expected to change starting in 2018 after the new regulated contracts in the SIC commence. As of March 31, 2016, the average remaining life of the company's contracts is approximately 11.6 years, and they include adequate fuel indexation clauses which closely match the company's generation costs mix. This contractual structure substantially mitigates the company's cash flow generation exposure to fuel price volatility and supports stable and predictable cash flow generation.

As of March 31, 2016, E. CL's total installed capacity was approximately 2,114 MW, which is expected to increase to 2,494 MW by 2018 when the IEM project is finalized. The company's largest off-taker in terms of PPA nominal amount is Corporacion Nacional del Cobre de Chile - Codelco (FC IDR 'A+'/Stable Outlook) with 27% of contracted capacity. The company's contract mix will shift with the addition of new generation capacity and the new regulated contracts in the SIC starting in 2018.

IMPROVED CONTRACTUAL POSITION

Starting in 2018, Fitch expects E. CL to benefit from higher segment and geographical diversification by having access to Chile's largest power system, the SIC and increasing its participation in the regulated segment. In December 2014, E. CL secured 15-year contracts to supply electricity to distribution companies in the SIC of up to 2,016 GWh (equivalent to 230 MW average) in 2018, and up to 5,040 GWh per year (575 MW average) between 2019 and 2032. The monomic price for these contracts is approximately USD115/MWh, which represents a price improvement compared with E. CL's average monomic price of USD91/MWh realized during first quarter (1Q16). The company has signed a 15-year LNG supply contract for use at its existing combined cycle units, further contributing to the predictability of its cash flow generation.

ADEQUATE CREDIT PROTECTION METRICS

E. CL maintains a sound credit profile supported by stable EBITDA generation and a moderating leverage level. As of the last 12 months (LTM) ended March 31, 2016, E. CL's EBITDA was USD294 million and gross leverage measured as total debt/EBITDA was 2.5x, unchanged from the gross leverage figure observed during 2015. EBITDA margins of 27.2% in the LTM March period are nearly 600 bps higher than the 21% registered in 2013 and 2012 as electric margins improved to nearly 47% in 2016 from the 42% observed in 2012 and 2013.

EBITDA results for 1Q16 were affected due to a reduction in fuel costs and other indices that adjust the PPA tariffs, as well as a decrease in gas sales, offsetting the positive effect of cost savings initiatives and FX-related impact. EBITDA margins for this period increased to 30.6%. Fitch is conservatively projecting EBITDA margins between 27%-28% over the next three years, with a margin expansion when IEM becomes operational and the new contracts at more favorable prices when the SIC contracts commence.

AGGRESSIVE CAPEX PROGRAM

The company continues an aggressive expansion phase which brings with it execution risk (e. g. construction delays, accidents, cost-overruns). Fitch is forecasting total capex investments for the company of approximately USD1.4 billion during 2016-2019, which is expected to be funded with internal cash flow generation, cash on hand and approximately USD200 million of incremental debt.

The largest projects currently being constructed are the 375 MW plant (320 MW net capacity) in the Infraestructura Energetica Mejillones complex - IEM1 (USD 1.1 billion) and the Transmisora Electrica del Norte (TEN) project (USD800 million). As of April 2016, these projects were 35% and 19% completed, respectively. IEM1 remains on schedule to become operational in 2018 and will be supplying energy for the company's SIC regulated contracts, while TEN has a commercial operation date (COD) date in 2017. IEM1 will result in additional capex investments of approximately USD960 million over the next three years, while non-recourse financing for TEN (off-balance sheet) is expected to be closed shortly. Capex contribution from E. CL for the TEN project will be 10% of the equity contribution, amounting to approximately USD60 million over the next two years.

TEN represents the transmission line connecting the SIC and SING (600 km connecting Mejillones in the SING to Copiapo in the SIC). In January 2016, E. CL sold 50% of its participation to partner Red Electrica Chile for approximately USD300 million (including reimbursement to E. CL of 50% of TEN's debt). Red Electrica Chile is part of Red Electrica Corporacion ('A'/Stable Outlook), the sole provider of transmission services in Spain.

LEVERAGE TO INCREASE: Fitch expects the company to remain FCF negative during the next three years as a result of its aggressive capex program. E. CL's credit profile is supported by its credit protection metrics, characterized by moderate leverage and solid interest coverage, though leverage is expected to rise in the next four years. Fitch expects the company to fund its expansion program via a combination of internal cash flow generation and its cash reserves, capital injections, and additional indebtedness. Leverage is expected to rise close to 3.5x during the peak capex period of 2017-2018, significantly improving in 2019 when the IEM becomes operational and the new contracts commence.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for E. CL include:

-- Electric margins remaining in the 47% -50% for 2016-2018 and exceeding 50% in 2019

--Gross installed capacity increases by 375MW in 2H'18 as a result of the completion of IEM1;

--Fitch conservatively assumes that total production will increase to approx. 12,200 GWh by 2019 with 4,000 GWh contracted at the improved contracted price;

-- Annual EBITDA averaging USD300 million for 2016-2017, significantly improving in 2019 as new contracts at improved prices commence and IEM1 comes on-line;

--Capex approximates USD1.4 billion for 2016-2019 with a significant portion related to the IEM project;

--Capex associated with TEN is financed through non-recourse project financing kept off the balance sheet and not being consolidated with E. CL;

--Dividend payments of 30% of net income during the construction period;

-- Generation by fuel mix remains stable until 2018. Starting in 2018, coal generation would represent approximately 58% of the company's generation mix as a result of the conclusion of the IEM.

--Monomic prices for 2016 of approximately USD95 with an average fuel and electricity purchase cost per MWh sold of USD49.

RATING SENSITIVITIES

A downgrade could result from

--Fundamental deterioration in capital structure as a result of the company's large investment plan, leading to a significant erosion of liquidity;

--A significant change in the company's contracted position in comparison to its generation mix, which could lead to a deterioration of cash flow stability;

--A significant increase in gross debt leverage to above 3.5x on a sustained basis once the company's investments are in operation.

A positive rating action is unlikely in the short - to medium-term given the company's aggressive capex investment plan during the completion of the IEM and TEN projects.

LIQUIDITY

After refinancing its USD350 million project finance debt at the Central Termoelectrica Andina (CTA) subsidiary level in October 2014, the company's current maturity schedule is entirely composed of a USD400 million senior unsecured bond due 2021 and a USD350 million senior unsecured bond due in 2025.

Total cash and equivalents amounted to approximately USD402 million as of March. 31, 2016, comfortably covering the short-term debt of USD8.9 million due during 2016. The sudden increase in the company's cash position is related to the proceeds obtained from the divestment of 50% of the TEN project. Additionally, the company's liquidity position is supported by a USD270 million undrawn five-year revolving credit facility. This unsecured credit facility has the typical balance sheet covenants (minimum equity, net financial debt/equity).

FULL LIST OF RATING ACTIONS

Fitch has affirmed E. CL's ratings as follows:

--Long-Term IDR at 'BBB'; Outlook Stable;

--Long-Term Local-Currency IDR at 'BBB'; Outlook Stable;

--National Long-Term Rating at 'A+(cl)'; Outlook Stable;

--International senior unsecured bond ratings at 'BBB';

Fitch has assigned the following rating:

--National Equity rating at 'Primera Clase Nivel 2'.