OREANDA-NEWS. Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of E.CL S.A. (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'. These rating actions affect, as of June 30, 2015, approximately USD750 million of outstanding international bonds.

The Rating Outlook is Stable.

KEY RATING DRIVERS
E.CL's ratings reflect the company's improved financial profile and expectations that the company will continue registering strong financial results in the near to medium term. The company is in a strong financial footing as it embarks on a significant expansion project that will lead to increased leverage for the company. Fitch projects that the company's leverage levels, as measured by total debt:EBITDA, will rise to the 3.5x-4.0x level during the peak construction period with leverage returning to the sub-3.0x level once projects come online.

E.CL's ratings reflect the company's sound financial profile, balanced contracted position, diversified generation matrix, as well as the implicit support provided by its main shareholder. Engie (formerly known as GDF SUEZ) is one of the largest power companies in the world and owns a 52.77% equity share in E.CL. In the past, ENGIE has actively participated in the company's capital structure through either intercompany loans or equity contributions. Credit risks associated with the company include construction execution risk as the company embarks on a large investment program, and the possibility that incremental leverage resulting from this investment program is sustained.

FAVORABLE CONTRACTUAL POSITION: E.CL benefits from long-term power purchase agreements (PPAs) with financially strong counterparties, primarily in the mining sector though this mix will change starting in 2018 when Power Purchase Agreements (PPAs) to supply energy to regulated customers commence. The average remaining life on the company's contract portfolio is 11 years, and these contracts include adequate fuel indexation clauses, which closely match the company's generation mix. This contractual structure substantially mitigates the company's exposure to fuel price volatility and supports a stable and predictable cash flow generation.

E.CL's total gross installed capacity amounts to approximately 2,108 MW while the company has long term contracts during the next four years for approximately 1,100 MW of net capacity. Although the company seems to have excess spare capacity to enter into more contracts, its strategy is to match fuel cost pass-through with its generation mix. Currently the company's contracts are mainly indexed to coal and are supported by its coal-fired installed capacity of approximately 1,119 MW (including Central Termoelectrica Andina (CTA) and Central Termoelectrica Hornitos (CTH)). CTA has a 21-year, 150 MW PPA with Corporacion Nacional del Cobre de Chile and CTH has a 15-year, 150 MW PPA with Minera Centinela. The company's largest offtaker in terms of PPA nominal amount is 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 company's recent wins in the regulated energy auctions.

SIC REGULATED CONTRACT WINS: In December 2014, E.CL secured 15 year contracts to supply electricity to distribution companies in the SIC. In 2018, the company is scheduled to supply 2,016 GWh (equivalent to 230 MW average), and then 5,040 GWh per year (575 MW average) between 2019-2032. The monomic price for these contracts were approximately USD124/MWh based on December 2014 inflation and fuel cost prices, which represents a slight price increase versus E.CL's current average.

With these new contracts, the company's customer mix, which is approximately 80% unregulated, will significantly shift allowing the company to become more diversified after incorporating more regulated customers. Additionally, E.CL will gain access to the SIC (Central Interconnected System), which is Chile's main and largest electric system. In order to meet these commitments, the company is engaging in the construction of a new USD1.1 billion coal-fired plant and an associated port, and has signed a new 15-year LNG supply contract for use at its existing combined cycle units. Furthermore, the company is also building out an interconnection transmission line between the SIC and SING (Northern Interconnected System).

LARGE CAPEX PROGRAM: After capital expenditures declined following the conclusion of E.CL's last capacity expansion program, the company is embarking on a new expansion which will lead to increased capex during the next four years. At present, the company has environmental approvals to build two 375 MW coal-fired plants (including transmission facilities and a mechanized dock) next to CTA and CTH. The company decided on constructing the first plant in the Infraestructura Energetica Mejillones complex, IEM1. This 375 MW plant (320 MW net capacity), which started construction in March 2015, will represent a USD1.1 billion investment. The power plant is expected to be operational in the second half of 2018 and will be supplying energy for the company's SIC regulated contracts.

The second major project the company is engaged in is the TEN (Transmisora Electrica del Norte) project, which represents construction of a transmission line connecting the SIC and SING (600km connecting Mejillones in the SING to Copiapo in the SIC). The transmission line was recently approved by the government as a key part of the trunk transmission system interconnecting the SIC and SING grids. Total capex for this project will be approximately USD860 million, with COD for the project expected in July 2017. The company is currently searching for an equity partner and financing for the project, but Fitch expects for the company to fully absorb the start-up costs in 2015, obtaining a partner in 2016. Once a partner is obtained, the project will be moved off E.CL's balance sheet.

Besides the two aforementioned large projects, Fitch is conservatively forecasting that the company will continue to invest in renewable energy projects and will also complete the Electrica Monte Redondo (EMR) hydro plant/wind farm acquisition during the next five years (though the company notes there is no timing available yet for this acquisition). Fitch considers this transaction imminent as EMR is owned by E.CL's parent company, but Engie has stated that E.CL will be its sole investment vehicle for electric generation in Chile. Given the large portfolio of projects, Fitch is forecasting total net capex for the company during the next five years of approximately USD1.7 billion.

MULTIPLE SOURCES OF FINANCING: E.CL management intends to maintain a strong investment grade rating, despite its ambitious buildout program. During the peak investment period, Fitch is forecasting that the company will reduce dividend payments to the minimum 30% payout rate. The company plans on financing IEM1 and the new port within its balance sheet with a mix of funding sources including its own cash flow generation, new senior debt (mainly through its recently closed USD270 million committed revolving credit facility), and equity-like funds that could include capital injections, subordinated/hybrid debt, and the future sale of non-core assets. Regarding TEN, the company plans to develop a 50:50 partnership (30% equity) to hold the asset off balance-sheet, and the project will be financed via non-recourse project finance debt.

SOLID FINANCIAL POSITION: As of the last 12 months (LTM) ended June 30, 2015, E.CL's EBITDA increased to USD304 million compared to USD252 in FY2013. EBITDA margins of 25.7% in the LTM June period are nearly 500 basis points higher than the 21% level registered in 2013 and 2012. The company's recent financial results have been assisted by higher spot market sales, take-or-pay capacity payments and incremental gas sales to other generators in the SING. Fitch is conservatively projecting for EBITDA margins to be in the 23%-24% level over the next four years, with a margin expansion when IEM becomes operational.

RETURN TO NEGATIVE FCF: In the LTM June 2015 period, the company generated CFO of USD282 million and after capex of USD233 million and dividends of USD33 million, FCF was USD15 million. This is a decline versus FCF of USD78 million in 2014, and reflects the ramped capex from IEM1 and TEN. Fitch is projecting that the company will be FCF negative during the next four years, with a return to positive FCF when IEM1 begins contributing to cash flow in 2019.

LEVERAGE TO INCREASE: 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. Total debt as of June 30, 2015 amounted to USD745 million, slightly down from USD763 million as of December 2013. As of the last 12 months (LTM) ended June 2015, E.CL's leverage was in-line for the assigned rating category at approximately 2.4x while interest coverage reached 6.0x. This compares favorably with leverage of 3.1x and 3.3x in 2013 and 2012 respectively and interest coverage of 5.4x during both years.

Fitch is projecting for the company to fund its expansion program via a combination of internal cash flow generation and its cash reserves, capital injections, and additional indebtedness. Accordingly, leverage is expected to rise to the 3.5x-4.0x during the peak capex period of 2017-2018, decreasing back to the under 3.0x level starting with 2019.

RATING SENSITIVITIES
A downgrade could result from (1) fundamental deterioration in capital structure as a result of the company's large investment plan, leading to a significant erosion of liquidity; (2) a significant change in the company's contracted position in comparison to its generation mix, which could deteriorate cash flow stability; or (3) a significant increase in gross debt leverage to above 3.5x on a sustained basis once the company's investments are in operation.

Due to a return to elevated capex expectations over the next four years for ongoing major projects, a positive rating action is not envisioned in the near to medium term.

LIQUIDITY AND DEBT STRUCTURE

STRONG LIQUIDITY: After the company refinanced its USD350 million project finance debt at the 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. As of June 2015, the company held USD234 million in cash on hand versus only USD17 million in short-term debt. In June 2015, the company strengthened its liquidity profile when it closed on a five-year revolving credit facility totaling USD270 million. The club deal with five major banks for this unsecured bullet facility has standard balance sheet covenants (minimum equity, net financial debt/equity). The company also has access to a three-year committed credit facility with Banco de Chile for an amount of UF1,250,000 (approximately USD50 million) for possible short-term funding needs.

KEY ASSUMPTIONS
--Growth in monomic prices of 1%/year;
--Energy sales increase by 2,016 GWh in 2018 and then by 5,040 GWh starting in 2019 as regulated contracts commence;
--EBITDA averaging in the USD300 million/year level until a step-up when the regulated contracts commence and IEM1 comes on-line;
--Net capex approximates USD1.7 billion over next five years;
--Peak leverage in the 3.5x-4.0x level during 2017-2018, with leverage returning to sub-3.0x level in 2019.

Fitch affirms the following:

E.CL S.A.
--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';
--International senior unsecured bond ratings at 'BBB';
--Long-term national scale rating at 'A+(cl)'.

The Rating Outlook is Stable.