Fitch Upgrades E.CL S.A.'s IDRs to 'BBB/A+(cl)'; Outlook to Stable

NEW YORK--()--Fitch Ratings has upgraded the foreign and local currency Issuer Default Ratings (IDRs) of E.CL S.A. (E.CL) to 'BBB' from 'BBB-' and its long-term national scale rating to 'A+(cl)' from 'A(cl)'. These rating actions affect approximately USD400 million of outstanding international bonds.

The Rating Outlook is revised to Stable from Positive.

Key Rating Drivers

The upgrade recommendation reflects E.CL's improving financial profile and expectations that the company will continue registering strong financial results in the near to medium term. In 2012, the company's cash flow generation was hurt by an indexation mismatch in fuel costs for its contract with Emel. This situation reversed and E.CL's cash flow generation has significantly improved over the last 18 months.

E.CL's ratings reflect the company's sound financial profile, balanced contracted position, and diversified generation matrix. Credit risks associated with the company include the potential to embark on a large investment program which could result in incremental leverage levels on a sustained basis beyond the guided range.

Favorable Contractual Position: E.CL benefits from long-term power purchase agreements (PPAs) with financially strong counterparties, primarily in the mining sector. The average remaining life on the company's contract portfolio is nine 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 installed capacity amounts to approximately 2,108 MW while the company has long term contracts for approximately 1,150 MW. 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 app. 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 Esperanza. The company's largest offtaker in terms of PPA nominal amount is Codelco (FC IDR A+, Stable Outlook) with 27% of contracted capacity.

Improved Financial Performance: As of the last 12 months (LTM) ended June 30, 2014, E.CL's EBITDA increased to USD289 million compared to USD252 in FY2013. EBITDA margins of 23.2% in the LTM June period are 200 basis points higher than the 21% level registered in 2013 and 2012. In 2012, the company's financial performance was hurt by an indexation mismatch in fuel costs for its contract with distributor Emel. This situation reversed and E.CL's cash flow generation has significantly improved over the last year. Furthermore, results have also been assisted by higher spot market sales, take-or-pay capacity payments and incremental gas sales to other generators in the SING. Fitch expects EBITDA margins to improve to the 26% level over the next four years.

Return to Positive FCF: In the LTM June 2014 period, the company generated CFO of USD247 million and after capex of USD103 million and dividends of USD60 million, FCF was USD84 million. This compares favorably with FCF of USD6 million in 2013 and negative FCF of 19 million in 2012. Fitch is conservatively projecting that the company will embark on significant expansion projects over the next four years, therefore a return to negative FCF though the company should be able to remain at the leverage levels appropriate for the rating category given nearly 9%/year EBITDA growth.

Improving Credit Metrics: Total debt as of June 30, 2014 amounted to USD778 million, down from USD793 million as of December 2013. Debt is composed of USD400 million senior unsecured notes due 2021 and the balance of project finance debt at CTA with limited recourse to E.CL. E.CL's credit profile is supported by its credit protection metrics, characterized by moderate leverage and solid interest coverage. As of the last 12 months (LTM) ended June 2014, E.CL's leverage was in line with the assigned rating category at approximately 2.7x while interest coverage reached 6.3x. 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.

Potential Large Capex Plan: While capital expenditures declined after the conclusion of the company's previous capacity expansion program, the possibility of significant investments persist should the company sign new PPAs. 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 is currently accepting construction bids on one of them, with construction being contingent on the signing of a new PPA (which would most likely be related to one of the mining projects currently being developed). In addition, the company is evaluating the construction of a transmission line connecting Mejillones (SING) to Copiapo (SIC) that would entail a 30 month construction period.

If both projects are carried out, Fitch expects them to be funded primarily with cash on hand, future cash flow generation and an increase in debt levels throughout the construction period. The latter may lead total debt/EBITDA to reach nearly 4.0x at its peak, rapidly decreasing once the new projects start operations.

Rating Sensitivities

A downgrade could result from (1) fundamental deterioration in capital structure as a result of a large investment plan exceeding manageable levels and 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 sustained increase in leverage above 4.0x as a result of investments.

Due to an expected return to elevated capex over the next four years due to upcoming major projects, a positive rating action is not envisioned in the near to medium term.

E.CL S.A. is an operating holding company engaged in generation, transmission and supply of electricity, and the transportation of natural gas in the north of Chile. E.CL is the fourth largest generation company in Chile and the largest electricity generation company in the Northern Electricity Interconnected System (SING), Chile's second largest power grid. In December 2009, E.CL (formerly EDELNOR) merged with Inversiones Tocopilla S.A. As a result of this merger, it acquired other generation and gas transportation assets in the Chilean Norte Grande region including Electroandina, Central Termoelectrica Andina S.A. (CTA), Inversiones Hornitos S.A. (CTH), Gasoducto Nor Andino S.A., and Gasoducto Nor Andino Argentina S.A. On April 28, 2010, the company changed its name from EDELNOR to E.CL. E.CL has an installed capacity of 2,108 MW (approximately 51% of SING's installed capacity). The company's majority shareholder is GDF Suez S.A., one of the largest power companies in the world, which owns a 52.77% equity share in E.CL and has actively participated in the company's capital structure through either intercompany loans or equity contributions.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com