New York, May 30, 2018 — Moody’s Investors Service (“Moody’s”) assigned a Baa2 first-time Issuer Rating to Enel Chile S.A. The outlook is stable. At the same time, Moody’s assigned a rating of Baa2 to the up to $1.0 billion proposed senior unsecured notes due 2028.
The proceeds of the issuance will be used to refinance outstanding borrowings, the proceeds of which were used to fund the acquisition of minority shares of its subsidiary Enel Generacion Chile S.A. (Enel Generacion, Baa1 stable) as part of the corporate reorganization concluded in April 2018, which included the incorporation of a new subsidiary Enel Green Power Chile S.A. (EGP Chile).
The Baa2 Issuer Rating reflects Enel Chile’s leading position in the Chilean generation and distribution markets combined with a strong commercial policy, reflective of a relatively comfortable contracted position at prices which are substantially above system marginal costs. Enel Chile benefits from a diversified and efficient energy generation fleet on a consolidated basis, with generation capacity above its short and medium term contracted positions. Furthermore, the issuer has committed to a modest capital investment program focused on increasing its participation in wind and solar power generation projects accompanied by long term power purchase agreements (PPAs).
Credit metrics are expected to remain strong, with CFO pre WC to debt and Interest Coverage expected to be above 25% and 6.5x, respectively, with a comfortable liquidity position. The rating further considers the structurally subordinated nature of the holding company debt to debt at its operating companies. Despite the large representation of holding company debt (expected to be approximately 35%-40% of total consolidated debt), the debt-free nature of subsidiary Enel Distribucion Chile S.A. (Enel Dx) somewhat offsets the issue despite its low representation of total EBITDA (approximately 17% – 20%) and expected dividend distributions (approximately US$50 million per year).
The Baa2 debt rating assigned to the proposed notes maturing in 2028 reflects their senior unsecured nature. The proposed bond indenture includes typical representations, warranties, and limitations on the addition of secured debt and engaging in sale-leaseback transactions. The indenture does not include financial covenants.
Enel Chile is the largest energy generation company in Chile, with a 28% pro-forma market share in 2017 considering the incorporation of EGP Chile as of April 2018. The company’s diversified energy generation mix, combined with its strong commercial policy, contributes to cash flow predictability. Enel Generacion has more than 20TWh per year under contracts at weighted average prices above US$85/MWh until 2022, while EGP Chile has fully contracted its current and expected generation capacity until 2024. The 17%-20% Ebitda contribution from Enel Dx’s regulated distribution business operating in the country’s largest market provides further comfort. Low geographic diversification, with operations limited to the energy sector in Chile (Aa3 negative), limits the rating.
The necessity to sign and/or renew PPA contracts is an important challenge and a key long term risk exposure. Approximately 35% (committed TWh) of PPAs at Enel Generacion expire by 2025, with the increased participation of wind and solar projects in the matrix leading to a shift in the price deck curve within the Chilean market, as shown in the October 2017 regulated auction. The incorporation of EGP Chile allows the company to manage contractual allocations more efficiently based on each subsidiary’s marginal costs and auction price results.
Currently, there is a moderate capex plan in place. While Enel Generacion’s short term plans are relevant, focused on concluding the Los Condores 150-MW hydro plant and the investments in the Bocamina II plant to improve over environmental issues, it is expected to represent less than 2% of net property, plant, and equipment. EGP Chile has a more ambitious plan, expected to increase installed capacity by 60% by 2024, largely focused on solar plants. In relative terms, Enel Dx’s plans are the largest among the three companies, estimated at 11% of net property, plant, and equipment. On a consolidated basis, capex is viewed as moderate, and estimated at around 6% of net property, plant, and equipment. Despite a strong track record in building generation projects and the relatively low complexity of solar projects, the expected generation capacity growth in EGP Chiles subjects the company to construction execution risks.
Even with the incorporation of a more leveraged company in EGP Chile (approximately 4.3x Debt/Ebitda as of September 2017), the company’s consolidated financial profile remains strong (approximately 2.9x Debt/Ebitda as of March 2018), underpinned by the low leverage of Enel Generacion and only intracompany debt at Enel Dx. We expect the company to post consolidated CFO pre WC to Debt and Interest Coverage ratios ranging between 25% – 30% and 6.5x — 7.5x, respectively, over the next five years.
The proposed senior unsecured notes are expected to partially address the company’s most immediate debt maturities, composed of the bridge loans in total amount of US$1.5 billion due in 2019. As of March 2018, the company’s total consolidated cash position was of approximately $650 million. Consolidated committed credit facilities at subsidiary levels, in total amount of more than US$300 million, further support the company’s liquidity profile.
The stable outlook reflects our expectation that Enel Chile’s subsidiaries will continue to successfully execute its commercial policy by focusing on extending its contracted position while maintaining strong credit metrics.
Atlantic Investors Service 