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Rating Action:

MOODY'S DOWNGRADES ENERSIS AND AFFILIATES TO Baa3 FROM Baa1

11 Sep 2002
MOODY'S DOWNGRADES ENERSIS AND AFFILIATES TO Baa3 FROM Baa1

New York, September 11, 2002 -- Moody's Investors Service downgraded the senior unsecured debt ratings of Enersis S.A. to Baa3 from Baa1. Also downgraded are the senior unsecured rating of Empresa Nacional de Electricidad S.A. (Endesa Chile) to Baa3 from Baa1, as well as the senior unsecured rating of Empresa Electrica Pehuenche S.A. (Pehuenche) to Baa3 from Baa1, concluding Moody's review on all three companies. The ratings outlook for all of the ratings is stable.

The ratings downgrade reflects Enersis' and Endesa Chile's increased business risk profile stemming from substantial non-Chilean operations, persistent weak cash flow coverage ratios for the ratings category, and consolidated leverage that is inconsistent with the rating in the context of the risk profile inherent in operating in several non-investment grade countries. The downgrade of Pehuenche reflects Moody's view that the credit risk of Pehuenche is very closely linked to the strength of Endesa Chile and Enersis.

The stable outlook reflects Moody's view that the adverse effects of continuing financial and political uncertainty in Brazil and Argentina will be balanced by management's pro-active efforts to improve Enersis' operations and financial structure.

As Endesa S.A.'s strategic investment vehicle into the electric sector in Latin America, Enersis' investments in Latin America include electric generation and distribution assets in Argentina, Brazil, Chile, Colombia, and Peru. Non-Chilean sources contribute a significant portion of Enersis' cash flow, with Brazil contributing more than 20% of consolidated cash flow, and Argentina contributing more than 10%. Reliance on cash flow from non-Chilean sources exposes Enersis to greater cash flow volatility and uncertainty associated with operating in these non-investment grade economies where macroeconomic factors, inflation, regulatory policies, political changes, and access to capital, are less predictable.

In Moody's view, Enersis' EBITDA/interest coverage ratios remain low for its rating category. EBITDA/interest over the last few years averages approximately 2.5x and is projected to improve to about 3X by year-end. Enersis has cross-default provisions with certain subsidiaries, which could theoretically result in default under financing instruments at Enersis under certain scenarios.

The ratings also consider support that has been provided to date by 65% owner Endesa S.A. (senior unsecured A2), the diversification benefits of operations in five different Latin American countries, including investment grade rated Chile, and efforts to reduce debt and achieve cost savings through enhancing the Genesis Project.

Moody's recognizes that Enersis has taken steps to reduce its debt load through asset sales. Consolidated debt has been reduced to $9.2 billion from $11 billion in the past two years. However, overall leverage is still high given the business risk at Enersis, and Moody's views cash flow levels as being insufficient for the prior rating level.

Moody's ratings consider Enersis' near-term strategy of debt reduction through asset divestiture, improving the existing business through enhancing the Genesis Project, and the focus on growth of existing operations. The ratings also incorporate the benefits derived from a diverse operation in five different Latin American countries. For the six months ended June 30, 2002, weaknesses in operating income from Brazil and Argentina were offset by better results from Chile, Colombia, and Peru.

Based in Santiago, Chile, Enersis is owned 65% by Endesa S.A., one of the largest integrated electric utilities in the world. Endesa Chile, an electric generation company primarily comprised of hydro facilities, is owned 60% by Enersis. Pehuenche, a 400 MW hydro facility in Chile is 94% owned by Endesa Chile.

New York
Daniel Gates
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Johnson
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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