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Rating Action:

Moody's reviews Enersis' Baa2 rating for downgrade; Endesa Chile's Baa2 affirmed with stable outlook

17 Nov 2015

New York, November 17, 2015 -- Moody's Investors Service, ("Moody's") placed today the Baa2 senior unsecured rating of Enersis S.A. (Enersis) under review for downgrade. Concurrently, Moody's affirmed the Baa2 senior unsecured rating of Empresa Nacional de Electricidad (Chile) S.A. (Endesa Chile). The outlook of Endesa Chile is stable.

Today's rating actions were prompted by the expected credit implications on Enersis' and Endesa Chile's ratings arising from the group's proposed reorganization announced on November 5, 2015. If the proposed reorganization is approved the holding company Enersis Americas, the successor company of Enersis, will hold the group's direct and indirect equity interests in all the non-Chilean electric distribution, transmission and power generation subsidiaries. These are currently held by Enersis and its subsidiaries Chilectra S.A. (not rated) and Endesa Chile. Enersis America, which will become the group's growth vehicle will also assume all of Enersis' current outstanding indebtedness. This includes the US$250 million Baa2 senior unsecured global Notes due in December 2016. A debt-free new holding company, Enersis Chile, will hold Enersis' majority ownership-stakes in Chilectra (99.1%) and Endesa Chile (60%) which is expected to retain its current indebtedness that at the end of September 2015 aggregated around US$1.7 billion including over US$350 million in intercompany loans with Enersis. The final terms of the reorganization and its completion are still subject to some uncertainty since it requires approval by at least two thirds of the companies' total voting shares. To that end, the Board of Directors of Enersis, Endesa Chile and Chilectra will convene an extraordinary shareholders' meeting on December 18, 2015. ENEL Spa (Baa2 stable) currently holds a 60.6% direct and indirect ownership interest in Enersis. That said, the completion of the reorganization is also subject to complying with certain other conditions which include limiting the withdrawal rights of the dissenting minority shareholders to maximum interest stakes of 6.7% and 7.72% of Enersis and Endesa Chile, respectively. Moody's notes some evidence of opposition to the proposed reorganization among some of the local pension funds.

RATINGS RATIONALE

ENERSIS

"The review for downgrade of Enersis' Baa2 senior unsecured rating is largely driven by Moody's view of the weaker credit quality of the cash flows that will be available to Enersis Americas to service the debt assumed from Enersis when compared to Enersis' current consolidated cash flows" said Natividad Martel, a Moody's Vice-President Senior-Analyst. For example, Enersis Americas would, unlike Enersis, lack direct access to the cash flows of Chilectra (not rated), a debt-free regulated electric distribution utility operating in Chile (Aa3 stable) with stable EBITDA (year-end 2014: around US$250 million), as well as to the dividends from Endesa Chile. In addition, the bulk of Enersis Americas' subsidiaries would be operating their unregulated generation, distribution and transmission services in countries with sovereign ratings that are significantly weaker than Chile, including Colombia (Baa2 stable), Brazil (Baa3 stable), Argentina (Caa1 stable) and Peru (A3 stable) which constrains the subsidiaries' ratings given their domestic operations and effectively caps the senior unsecured rating of Enersis Americas.

The review of Enersis' Baa2 senior unsecured rating will assess the extent of the benefits arising from these subsidiaries' geographic and operational diversification that could potentially offset the structural subordination considerations that Moody's usually applies when rating holding-company indebtedness. To this end, the review will focus on Enersis Americas' exposure to each of these subsidiaries in terms of anticipated up-streamed dividends and their contribution to consolidated EBITDA (adjusted to reflect the actual ownership stakes). The review will also consider the anticipated modest indebtedness expected at the new holding company, the dividend policy of this growth vehicle with a target payout ratio of around 50% as well as its expected access to around US$1.2 billion in cash (largely related to the remaining proceeds from Enersis' capital increase completed in 2013). The review will also consider the new group's intra-group financial and liquidity arrangements between Enersis Americas and its new subsidiaries, including access, if any, to committed revolving credit facilities. It will also assess any impacts on the group's liquidity profile should the dissenting minority shareholders exercise their withdrawal rights mentioned earlier. The amount of the withdrawal cash payments is still uncertain but could approximate US$700 million in Enersis' case. Moreover, Moody's review will also consider any possible credit implications should Enersis Americas still be somewhat responsible in supporting the existing local indebtedness at Endesa Chile. This possibility reflects Endesa Chile's local debt legal documentation that indicates that local debt-holders are entitled to be serviced by all the entities that result from Endesa Chile's reorganization. The completion of the review will follow shortly after the shareholder vote and the conclusion of any other decisions regarding the reorganization.

ENDESA CHILE

The Baa2 rating affirmation of Endesa Chile acknowledges the group's recent improvement in the operational and financial performance in Chile. That said, the reorganization is credit negative for Endesa Chile because it would lose the benefits from its current geographic and operational diversification. Moody's analysis considers that the aggregate dividends received from its non-Chilean subsidiaries during the 2012-2014 period totaled around US$750 million and significantly helped Endesa Chile to offset the negative financial impact of the headwinds faced in its local market such that it was able to report consolidated credit metrics that were strong for the Baa-rating category with a 2012-2014 consolidated CFO pre W/C to debt ratio that averaged around 40%. The affirmation of Endesa Chile's Baa2 rating acknowledges that full operations at the 128MW Bocamina I and 350MW II units resumed during the 3Q2015 while the lease agreement entered with AES Gener's Nueva Renca combined cycle plant helped supplement Endesa Chile's output amid the water-related technical challenges affecting its San Isidro CCGT-plan. These events amid lower marginal power costs are helping Endesa Chile to balance its commercial position and improve its financial performance. For example, Moody's calculates that the Chilean operations of Endesa Chile's Cash Flow pre W/C (CFO pre-W/C) to debt (including Enersis' shareholder loan) averaged around 15% during the 2012-2014 period but increased to approximately 20% for the last twelve month period ended in September 2015. This metric is still under the lower-range of the Baa-rating category according to the guidelines provided under Moody's Unregulated Utilities and Power Companies rating methodology; however, the affirmation of the Baa2 rating anticipates that Endesa Chile's cash flows will further benefit during the 4Q2015 and 2016 from the full period operations at the Bocamina I and II units and the improving hydrology conditions in Chile.

Endesa Chile's stable outlook assumes that should the reorganization be implemented the group's remaining Chilean operations will be able to record credit metrics that are well positioned within the Baa2-rating category. Specifically, that its 3-year CFO pre-W/C to debt, Interest Coverage and Retained Cash Flow (RCF) to debt will average well above 25%, 5.0x and 15%, respectively. To this end, the stable outlook assumes that the shareholders' approval of the transaction will not be subject to conditions that are more onerous for Endesa Chile's financial and dividend policies. For example, no significant changes in the proposed payout ratio for the Chilean operations that foresee a progressive step-up of the ratio to 70% by 2020 from 50% currently. The stable outlook also assumes that any new indebtedness will be only incurred to fund new expansion projects while management also considers the re-contracting risk the issuer will face as a substantial portion of its long-term Power Purchase Agreements in Chile start expiring in 2021 and the pending outcome of the next public auctions to allocate significant portions of the Chilean utilities' load. The stable outlook further assumes that Endesa Chile will maintain an adequate liquidity profile, particularly if it has to make payments to dissenting minority shareholders that could approximate US$300 million. It also assumes access to external liquidity arrangements after the scheduled expiration of its current revolving credit facilities in February and June 2016.

An upgrade of Endesa Chile's rating is likely if the Chilean operations of Enersis Chile are able to meet the group's publicly announced financial targets as the issuer will account for the bulk of the consolidated EBITDA. This includes for 2016 a consolidated EBITDA and margin of around US$1.2 billion and 33%, respectively, that are anticipated to further grow to US$1.6 billion and 39% by 2019. Moody's understands that one of the key drivers includes significant cost saving initiatives to be implemented over the next several years. These are not without challenges but if successfully implemented positive momentum on Endesa Chile's rating is likely. This will the case if Endesa Chile is able to record key credit metrics that are well positioned in the upper-range of the Baa-rating category according to the methodology guidelines. Specifically, if its 3-year CFO pre-W/C to debt, Interest Coverage and RCF to debt exceed 30%, 6.5x and 20%, on a sustainable basis. Downward rating pressure is likely if Endesa Chile fails to record key credit metrics that are comfortably positioned within the mid-range of the Baa-rating category. Specifically, if its 3-year average CFO pre-W/C to debt, Interest Coverage and RCF to debt remain below 25%, 4.5x, and 17%, on a sustainable basis. A downgrade or outlook change could also be triggered if the company's liquidity profile were to become weak for the investment grade rating category and/or if after completion of the reorganization a material amount of indebtedness would be incurred at its new holding company, Enersis Chile.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Santiago, Chile, Enersis S.A is the largest private power holding company in South-America with a portfolio of ownership stakes in several subsidiaries and affiliates operating in the electric generation, distribution and transmission sectors in five countries. Please refer to the Credit Opinion published on our website for the details.

Headquartered in Santiago, Chile, Empresa Nacional de Electricidad S.A. (Endesa Chile) is an operating holding company. The group ranks among the largest private generation companies in South-America with an aggregate installed generation capacity of around 14.7 gigawatts; excluding the 987MW of its non-controlled Endesa Brasil. In Chile, Endesa Chile and its Chilean subsidiaries operate almost 6.4GW of total installed capacity. Please refer to the Credit Opinion published on our website for the details.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews Enersis' Baa2 rating for downgrade; Endesa Chile's Baa2 affirmed with stable outlook
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