Fitch Affirms Endesa Chile's IDRs at 'BBB /AA(cl)'; Outlook 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 June 2015, shares of Endesa Chile demonstrate solid liquidity and are 100% available on the Santiago Stock Exchange (shares also trade in the Latibex and NYSE through ADRs). The shares' average trading volume for the June 2015 rolling 12-month period was USD5.4 million, which is down year-over-year (YoY). Endesa's free float is 40%, as the main shareholder, Enersis, owns 60% 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, under its present corporate structure, are manageable and include possible pressure from controlling shareholder Enel S.p.a. (IDR of 'BBB+', Outlook Stable) to increase dividends. The company recently announced a corporate reorganization that would separate the business into Chile entities and international entities. The proposal is in its preliminary stages with limited details known at this time, but Fitch will be closely monitoring developments going forward for the possible credit impact of a new corporate structure. 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 6% of first quarter 2015 (1Q15) EBITDA and Endesa Chile does not face cross-default risk from these operations.
Corporate Reorganization: The proposed corporate restructuring recently announced by Enersis S.A., at the behest of parent company Enel SpA, is still in its preliminary stages with limited details known at this time. In Fitch's view, the ramifications of the corporate restructuring could be either neutral or negative to Enersis and Endesa Chile's credit profiles. Fitch believes it is too early to complete a full credit analysis of the proposed restructuring and a more complete assessment should be possible once more key data points become available over the next few months given the preliminary nature of the transaction. Fitch will be closely monitoring developments going forward.
In a regulatory filing to the Chilean Superintendencia de Valores y Seguros (SVS) on April 27, 2015, Enersis disclosed details about the potential corporate restructuring of both Enersis and Endesa-Chile. The main results of the corporate reorganization, if approved by all major stakeholders, would be:
--Separate out the Chilean and International operations, which are currently entirely under the Enersis umbrella, into a new structure under the 'Enersis Chile' and 'Enersis Americas' umbrellas;
--The company's Chilean distribution business (Chilectra S.A.) and generation business (Endesa-Chile) would operate under Enersis Chile;
--The company's generation and distribution businesses in the rest of Latin America would operate under Enersis Americas;
--The estimated timeline from approval to a final separation would be approximately 12 months after the transaction is approved in an extraordinary shareholder meeting.
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 56% of its generation matrix as of March 2015. 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. Under the company's current corporate structure, 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 34% of 2014 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 positions the company favorably against its competitors that use higher cost fuels, and this advantage should become more pronounced given the recently completed expansion of LNG Quintero's regasification capacity to 15 million m3 from 10 million m3.
Bocamina II Coming Back Online: After a work stoppage of nearly a year-and-a-half, the Bocamina II coal plant is on the verge of returning back to full commercial operations. The 350 MW plant is currently in the testing phase and should resume commercial operations in 3Q15. In December 2013, a Chilean appeals court ordered the suspension of operations at this plant due to environmental issues. After several judicial/regulatory steps, the Comision de Evaluacion Ambiental of the Biobio region notified Endesa in April 2015 that it approved the company's environmental optimization plan for the Bocamina II generation unit. The company committed to USD190 million in investments to make environmental-related improvements to the plant. During dry hydrological months (first half of the calendar year), Fitch estimates that Endesa Chile's incremental cost from this stoppage at Bocamina II has averaged approximately USD800,000 to USD1 million per day due to the cost of having to pay spot prices to fulfill energy contracts.
Manageable Medium-Term Expansion Program: Endesa Chile has a moderate short- to medium-term expansion program. Its main project under construction is El Quimbo, a 400MW hydroelectric plant in Colombia. With a total investment of USD1.2 billion, El Quimbo is expected to begin operations in the second half of 2015. The Los Condores Hydolectric Project, a 150MW run-of-the-river hydroelectric plant is expected to be operational by the end of 2018 after a total investment of USD662 million.
Notably, the large Hydroaysen (2,750 MW) hydro project and coal-fired Punta Alcalde (740 MW) projects were cancelled by Endesa following legislative/judicial setbacks. Endesa Chile continues to study several expansion projects in Chile and Peru including Curibamba (188 MW), Taltal (+120 MW), and Neltume (490 MW). In Fitch's view, the company's investment pipeline 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 cumulative free cash flow is forecast to remain positive during the next four years, even assuming annual capex would remain above the USD733 million spent in 2014.
Credit Metrics to Remain Solid: Endesa maintains a sound credit profile supported by stable EBITDA generation and a moderating leverage level. As of the last 12 months (LTM) March 31, 2015, interest coverage ratio (adjusted EBITDA-to-interest) stood at 6.9x (versus 6.1x in 2013), while leverage measured as total debt-to-adjusted EBITDA was 1.6x (versus 1.7x in 2013), and net debt-to-adjusted EBITDA was 1.5x (versus 1.4x in 2013).
For the LTM March 2015 period, the company's adjusted EBITDA was USD2.055 billion, and even despite the Bocamina II stoppage for half the year, Fitch expects EBITDA of USD2.1 billion in 2015. The re-start of Bocamina II will not have a significant effect in 2015 given the second half of the year is more reliant on hydro generation. Long term, Fitch is conservatively estimating for EBITDA to approximate the mid-USD2.5 billion level in the next five years as new projects, such as El Quimbo and Loss Condores, come on-line. Fitch expects Endesa to maintain interest coverage above 6x and a gross leverage ratio at 2.0x or below, between 2015-2019.
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. Furthermore, Fitch is awaiting further details regarding the company's future corporate reorganization in order to fully assess the credit profile of Endesa Chile.
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.
LIQUIDITY AND DEBT STRUCTURE
Sound Liquidity and Manageable Debt Maturity Profile: Endesa Chile's credit profile is supported by ample consolidated liquidity as the company had USD217 million of cash as of March 2015 and access to USD326 million of committed revolving credit lines; that compares positively to short-term debt of USD330 million. As of March 2015, total debt was USD3.185 billion, and, going forward, debt maturities are manageable with USD330 million due in 2015, USD188 million in 2016, and USD69 million in 2017.
KEY ASSUMPTIONS
--Bocamina II power plant re-starts commercial operations in 2H15;
--Capex for 2015-2019 above company guidance of USD3.5 billion;
--Adjusted EBITDA approaches USD2.5 billion/year within the next five years as projects come on-line;
--Dividend payout rate of 70%, though company guidance is for a 50% payout rate;
--Interest coverage above 6x and a gross leverage ratio at 2.0x or below between 2015-2019.
Fitch has affirmed the following ratings:
Empresa Nacional de Electricidad S.A.
--Foreign and local currency IDRs at 'BBB+';
--International senior unsecured bond ratings at 'BBB+';
--Long-term national scale rating at 'AA(cl)' ;
--Short-term national scale rating at 'N1+';
--National senior unsecured bond ratings at 'AA(cl)' and the national short-term debt rating at 'N1+';
--National Equity Rating at 'Primera Clase Nivel 1 (cl)'.
The Rating Outlook is Stable.
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