Fitch Affirms Enersis S.A.'s IDR's at 'BBB+'/'AA(cl)'; Stable Outlook

NEW YORK--()--Fitch Ratings has affirmed Enersis S.A.'s foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and Long-term national scale rating at 'AA(cl)'. In addition, Fitch has affirmed Enersis' Short-term national scale rating at 'N1+'. These rating actions affect approximately USD250 million of outstanding Yankee bonds and USD42 million of domestic bonds. The Rating Outlook is Stable.

Fitch also affirmed Enersis' national Equity Rating at 'Primera Clase Nivel 1 (cl)'. The rating is based on the company's significant market capitalization in comparison with other equities in the stock exchange. As of June 2015, Enersis' shares demonstrate high liquidity, with a market capitalization of USD16.286 billion. The shares are 100% available in the Santiago Stock Exchange, and an average trading volume for the rolling 12 month period as of June 2015 of USD7.523 million.

KEY RATING DRIVERS

Enersis' ratings reflect its solid business platform with a strong degree of business and geographic diversification, and solid financial/operational metrics. As of year-end 2014, the company's distribution business represents 44% of EBITDA providing a degree of earning stability as it operates under supportive regulatory environments. Under the company's current corporate structure, geographic diversification through Latin America provides a natural hedge to different regulations, weather conditions and economic situations. The Stable Outlook is driven by Enersis' adequate liquidity profile and credit metrics and the expectation that a balanced mix between generation and distributions businesses will be maintained.

Credit risks associated with the company include pressure from controlling shareholder Enel S.P.A. (Italy: rated 'BBB+'; Stable Outlook by Fitch) to promote any extraordinary dividends, possible environmental and/or political issues that could result in cost overruns or modifications of projects under construction; although these risks appear manageable. The ratings also consider the company's dependence on dividend payments from its subsidiaries to repay its own debt and incorporate the seasonal and regional cash flow volatility. Finally, the company recently announced a corporate reorganization that would separate the business between 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 due to a new corporate structure.

Corporate Restructuring: The proposed corporate restructuring recently announced by Enersis, 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 its subsidiary Empresa Nacional de Electricidad S.A.'s (Endesa-Chile, IDR: 'BBB+'; Stable Outlook) credit profiles. Fitch believes it is too early to complete a full credit analysis of the proposed restructuring and a more complete analysis should be possible once more key data points are 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 result 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 newly created '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.

Balanced Profile Continues: Enersis enjoys a strong business platform underpinned by a balanced portfolio of regulated and non-regulated activities and a well-diversified geographic presence. Consolidated EBITDA streams in the 2014 period are well diversified amongst Colombia (40%), Brazil (24%), Chile (22%), Peru (13%), and Argentina (1%).

Historically Enersis' cash generation has been close to evenly split between its power generation and power distribution businesses, however in 2014 Generation and Distribution represented 56% and 44% of consolidated EBITDA respectively. This mix change can be attributed to faster growth in the Generation business while the Distribution business has been hampered by elevated energy costs negatively impacting Brazilian distributors.

In the generation business, operations are concentrated in its subsidiary, Endesa Chile. Enersis generation business' conservative commercial policy is a key strength to reduce the company's exposure to hydrology risk as hydropower generation represents 52% of its generation matrix as of December 2014.

On the distribution side of the business, the cash flow stability and reliability of Enersis' regional distribution companies is sound, yet distributions to the holding company can at times be difficult to predict as they might be subject to legal restrictions of each country and the willingness of the other shareholders to distribute operating cash. EBITDA in this business segment is also well-distributed geographically between Chile (18%), Brazil (42%), Colombia (33%), and Peru (12%). The Argentina business, given the tariff freeze since 2001 is running at a mostly break-even rate, though 2015 could make it a positive contributor. The company's major distribution subsidiaries include Chilectra S.A. (Chile), Ampla (Brazil), Coelce (Brazil) and Codensa (Colombia), who each have substantial market share in their respective countries.

Positive Start to 2015 After Difficult 2014: As of the last twelve months (LTM) March 2015 period, the company registered adjusted EBITDA of USD4.024 billion, which is 9% below full-year 2013 figures. The company's 2014 results were negatively impacted by difficult year-over-year comparisons in its Argentine business unit given a net USD300 million one-time positive effect in 2013 versus 2014 results. In addition, in the Generation sector, results were negatively impacted by the shut-down of the Bocamina II generation unit for the entire year.

Results are off to a promising start in 2015 as EBITDA of USD840 million increased by 27% on a year-on-year basis. One significant driver of this outperformance was a USD80 million inflow in Argentina due to Resolution 32, which represents a regulatory catchup to cover operation and maintenance expenses. It is still uncertain if this inflow will be recurring throughout the year, but represents a positive opportunity for the company.

Manageable Investment Program: In 2015, the company disclosed it will be spending capex of approximately USD9.4 billion on a consolidated basis during the 2015-2019 period. The capex mix is expected to be 25:75% between Chile and the company's international holdings. No further details have been provided about the timing and type of investments, and Fitch will monitor the impact of these investments in Enersis' credit profile, as the details are announced. Overall, Fitch believes the company's investment plan should not require additional significant indebtedness given the company's strong free cash flow generation.

Strong Credit Metrics: Despite lower EBITDA generation in 2014, Enersis maintains strong credit metrics with an LTM March 2015 EBITDA-to-interest ratio of 6.9x and gross leverage defined as debt-to-adjusted EBITDA of 1.4x. Gross leverage declined to 1.4x in the LTM March period from 1.6x in 2013. Adjusted EBITDA for the latest 12 months was USD4.0 billion and free cash flow was positive after capital expenditures of approximately USD 1.6 billion and consolidated dividends payments of USD 1.1 billion. Free Cash Flow of USD162 million remains positive, though it is down significantly versus the last three year average of USD1.1 billion in free cash flow generation. Enersis' individual dividend payments are in the range of USD500 - 600 million per year.

Consistent with Fitch's previous forecast, Enersis moderately increased its EBITDA to a level of USD4.0 billion in 2014. Going forward, Fitch expects EBITDA, under the current corporate structure, to average in the low-USD4 billion between 2015 - 2019. This moderate EBITDA growth is expected to be mainly driven by organic growth at both its power distribution and generation segments and a normalization of Brazilian operations. EBITDA at its generation business unit is expected to remain stable at USD2 billion-range in 2015 and increase in 2016 with the Bocamina II plant operational and after the El Quimbo power plant becomes operational. Consolidated capital expenditures are estimated to approximate nearly USD2 billion/year, during the next few years and are expected to be funded with the company's own cash flow generation. Should this level of capex materialize, free cash flow is expected to be slightly positive to break even.

RATING SENSITIVITIES

A change in Enersis' power generation business' commercial policy that results in an imbalanced long-term contractual position, and/or a material and sustained deterioration of credit metrics (reflected in a Debt to EBITDA ratio greater than 3x and EBITDA to interest coverage below 4x) could result in a negative rating action. Furthermore, Fitch is awaiting further details regarding the company's future corporate reorganization in order to fully assess the credit profile of Enersis.

A material improvement in credit metrics that could be sustained over time, a reduction in debt levels, and diminished pressure from shareholders to distribute dividends could result in a positive rating action. Sustained gross debt to adjusted EBITDA ratios in the 1.5x level would be viewed positively.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity Maintained: Enersis' credit profile is supported by ample consolidated liquidity with USD2.1 billion of cash as of March 2015 and access to a USD606 million of committed and undrawn credit lines. Consolidated long-term debt maturities are manageable with USD653 million in short-term debt. Fitch expects the company will refinance a portion of its debt maturities. In the short to medium term, Fitch is forecasting for leverage as measured by total debt-to-EBITDA to remain at or below 2.0x, between 2015 - 2019.

KEY ASSUMPTIONS

--Bocamina II power plant re-starts commercial operations in 2H15;

--Capex for the 2015-2019 period totals above company guidance of USD9.4 billion;

--EBITDA remains in the low-USD4.0 billion/year range during the next five years as projects come on-line;

--Dividend payout rate of 60%, which is higher than the company's current 50% payout rate;

--Gross leverage ratio at 2.0x or below between 2015-2019.

FULL LIST OF RATING ACTIONS

Fitch affirms the following:

Enersis 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 'AA(cl)' ;

--Short-term national scale rating at 'N1+';

--National senior unsecured bond ratings at 'AA(cl)';

--National short-term debt rating at 'N1+';

--National Equity Rating at 'Primera Clase Nivel 1 (cl)' ;

The Rating Outlook is Stable.

Date of Relevant Rating Committee: 18 June 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986715

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Contacts

Fitch Ratings
Primary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paula Garcia
Director
+562-2-4993316
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paula Garcia
Director
+562-2-4993316
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com