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TEXT-S&P affirms Emgesa ratings at 'BBB-'
February 29, 2012 / 9:49 PM / 6 years ago

TEXT-S&P affirms Emgesa ratings at 'BBB-'

     -- Emgesa's operating and financial performance has been in line with our 	
     -- We are affirming our ratings on the company at 'BBB-'.	
     -- The stable outlook reflects our expectation that the company will 	
continue to develop strong investment plans without significant financial 	
pressures, given its strong competitive position, adequate liquidity, and good 	
near-term economic growth prospects.	
Rating Action	
On Feb. 29, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 	
ratings on Emgesa S.A. E.S.P. The outlook remained stable. The rating action 	
was part of our regular review.	
Our ratings on Emgesa, as Colombia's second-largest power generator by 	
installed capacity, reflect our assessment of the company's business risk 	
profile as "satisfactory" and its financial risk profile as "intermediate," as 	
our criteria define those terms.	
We view the company's credit quality as intertwined with that of its sister 	
company, CODENSA S.A. E.S.P. (not rated), because of the high integration 	
between the two companies including shared management, support units, and 	
ownership; and the existence of intercompany loans to optimize cash allocation 	
and diversify financing sources. Therefore, we follow a consolidated approach 	
to the rating. Empresa Nacional de Electricidad S.A. Chile (Endesa Chile; 	
BBB+/Stable/--) and Endesa Latinoamerica S.A. (not rated) jointly hold 48.5% 	
of Emgesa's capital stock. Endesa Chile has the right to appoint a majority of 	
Emgesa's board of directors pursuant to an agreement between them, and it 	
holds 56.4% of Emgesa's voting shares. Endesa Chile is an indirect subsidiary 	
of Spanish utility Endesa S.A. (A-/Watch Neg/A-2), which is in turn controlled 	
by Italian group Enel SpA (A-/Watch Neg/A-2). Empresa de Energia de Bogota 	
S.A. E.S.P. (EEB; BB+/Positive/--) holds 51.5% of the capital stock and 43.6% 	
of the voting shares in Emgesa. Bogota Distrito Capital (BBB-/Stable/--) 	
controls 81.5% of EEB. CODENSA has a similar ownership structure and final 	
controlling stakes, but through different holding companies.	
The ratings on Emgesa reflect our view of the company's strong competitive 	
position, satisfactory free cash flow generation, and relatively low leverage. 	
Those factors are partially offset by Emgesa's inherently volatile 	
profitability and cash flow, given its exposure to hydrological risk and its 	
aggressive practice of paying dividends equivalent to 100% of its net profits.	
We expect Emgesa's cash flow generation to remain solid but volatile, 	
supported by favorable near-term economic growth prospects, even though it 	
depends on hydrological conditions. Assuming about 3% annual growth in power 	
demand and normal hydrological conditions, funds from operations (FFO) to 	
total debt will likely remain at 25% to 35%, and total debt to EBITDA at less 	
than 2.5x.	
On a consolidated basis, and because CODENSA has shown stronger and more 	
stable stand-alone financial performance than Emgesa has, we expect FFO to 	
total debt and debt to EBITDA of 35% to 45% and less than 2x, respectively.	
We believe that Emgesa currently has "adequate" liquidity to meet its needs 	
over the next two years. Relevant aspects of our assessment of the company's 	
liquidity profile include:	
     -- Sources of liquidity (including FFO and cash balances) exceeding uses 	
by at least 1.2x over the next two years;	
     -- Liquidity sources continuing to exceed uses, even if EBITDA were to 	
decline by 20%;	
     -- Good access to the credit markets, especially in Colombia; and	
     -- A current absence of financial covenants.	
Also, the company's significant combined cash balances, along with a smooth, 	
manageable debt maturity profile and ability to generate good free cash flow, 	
support our assessment of an adequate liquidity position. These attributes 	
mitigate the aggressive dividend payments, and the expected capital 	
expenditures of more than Colombian pesos (COP) 850 billion (about $445 	
million) annually in the next three years for Emgesa and CODENSA 	
combined--including expected investments in the 400-megawatt El Quimbo 	
hydroelectric project.	
As of Dec. 31, 2011, Emgesa and CODENSA had about COP1,002 billion in 	
aggregate cash and cash equivalents (about $500 million), exceeding short-term 	
debt of about COP466 billion (about $233 million). We don't expect dividend 	
payments to jeopardize the company's repayment or refinancing capacity. On the 	
contrary, we expect it will exercise some flexibility in its dividends and 	
capital expenditures to meet any further unexpected financing needs or 	
challenging conditions in the refinancing market.	
Neither Emgesa nor CODENSA has financial covenants on its outstanding debt 	
instruments. Under the terms and conditions of the proposed notes, the company 	
would be obliged to offer to purchase the notes under certain 	
change-of-control events. In our view, a change of control is unlikely in the 	
medium term.	
The stable outlook reflects our expectation that Emgesa and CODENSA will be 	
able to maintain financial performance commensurate with our expectations for 	
the current ratings, supported by a strong competitive position and good 	
near-term economic growth prospects. Consequently, combined FFO to total debt 	
will likely exceed 35% and total debt to EBITDA will likely remain at less 	
than 2x. We believe rating upside is limited at this point and depends on 	
material improvements in Colombia's business environment. We could lower the 	
ratings, however, if the company assumes a more aggressive leverage that could 	
deteriorate its main credit metrics, leading, for example, to a combined debt 	
to EBITDA of more than 2.5x on a permanent basis; or if construction of the El 	
Quimbo project is significantly delayed.	
Related Criteria And Research	
     -- Standard & Poor's Standardizes Liquidity Descriptors For Global 	
Corporate Issuers, July 2, 2010	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Methodology: Criteria For Determining Transfer And Convertibility 	
Assessments, May 18, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
Ratings List	
Ratings Affirmed	
Emgesa S.A. E.S.P.	
 Corporate Credit Rating                BBB-/Stable/--	
 Senior Unsecured                       BBB-	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 	

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