Fitch Ratings Affirms CGE at 'A-'; Outlook Stable.

SANTIAGO, Chile -- Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDRs) of Compania General de Electricidad S.A. (CGE) at 'A-'. The Rating Outlook is Stable. The Chilean National Scale rating has also been affirmed at 'AA(chl)' and the commercial paper rating at 'F1+(chl)'.

CGE ratings reflect the stability and diversification of its Chilean electricity and gas businesses. CGE benefits from a constructive regulatory environment for its electricity affiliates, well-diversified customer base, geographically and by customer type, solid demand growth for both electricity and gas, and a satisfactory debt amortization profile and liquidity position. However, consolidated credit protection measures are low for the rating category and the holding company debt is structurally subordinated to operating company debt.

Despite gradual improvement in leverage over the last few years, CGE's credit protection measures remain weak for the rating category. Over the last three years, debt-to-EBITDA has gradually improved from a high of 4.9 times (x) in 2002 to the current level of 4.2x in June 2006. Over the same period, interest coverage improved somewhat to 4.4x from 3.1x. CGE owns a 56.6% interest in Gasco (rated 'AA-(Chl)' by Fitch), a diversified gas business, and consolidates its financials statements. As of June 2006, Gasco and Metrogas represented 42.6% of the consolidated financial debt of CGE and 46.7% of the latest 12 months (LTM) consolidated EBITDA of the company. Debt at the holding company is structurally subordinate with 24.4% of the consolidated debt at the holding company and the remainder spreads across the operating subsidiaries. In June 2006, the individual debt to dividends received by subsidiaries in LTM ratio was 3.30x.

CGE is evaluating its entrance into the electric generation business, which would moderately increase business risk and could slow improvements in debt leverage. CGE has water rights to develop 400 mega-watts (MW) of hydroelectric generation capacity in Chile. CGE is studying the feasibility to develop these water rights through the new subsidiary CGE Generacion. The first project under consideration is Central Hidroelectrica Nuble, a run-of-the-river hydro facility of 136 MW, which involves an investment of US$140 million and a building period of about 30 months. Increasing business risk in electric generation could pressure credit quality unless offset by lower financial risk.

Regulatory risk of the electricity distribution business is moderate with the next tariff reset occurring in 2008. In the last four-year tariff adjustment held in November 2004, the CGE group (CGE Distribucion, Conafe, and Edelmag) received an 8% reduction in the average tariff of Valor Agregado de Distribucion (VAD). Fitch expects that continued strong demand growth will help offset the effect of the lower distribution tariffs set by the regulator. The electricity subsidiaries have long-term supply contracts with local generation companies Endesa-Chile, Guacolda, and Colbun, minimizing exposure to potential spot market purchases. Long-term contract purchases are made at node prices and passed through directly to the customer, which reduces exposure to commodity price risks.

CGE participates in the liquefied petroleum gas (LPG) business in Chile through Gasco, which provides diversification. Gasco also participates through subsidiaries and related companies in natural gas distribution and pipelines, including Metrogas, S.A., a natural gas distribution utility in the Santiago metropolitan region. Since May 2004, the Chilean power sector and natural gas distribution companies have experienced varying degrees of disruption of natural gas imports from Argentina, affecting the natural gas supply and the operational costs of Metrogas, restricting the sales to industrial consumers. The severity of future interruptions of natural gas supply from Argentina is still uncertain, and Argentina is expected to continue meeting domestic needs ahead of exports. Despite periodic gas curtailments, financial performance of Gasco and Metrogas remain satisfactory. Since 2009, a liquefied natural gas (LNG) project developed in Chile by a pool of companies, including Metrogas, mitigates the supply risk, despite the expected increase in the supply cost.

CGE operates in the liquefied gas and natural gas distribution business, as well as natural gas and electricity distribution in Argentina. The electricity subsidiaries and affiliates of CGE distribute electricity to 1.5 million costumers in Chile and 676,000 in Argentina. CGE participates in the gas business in Chile through Gasco, which operates sales, distribution, and transportation of liquefied natural gas (LNG). Metrogas, 51.8% owned by Gasco, participates in the natural gas business in the Central Area. In 2005, the consolidated sales of CGE were US$1.66 billion.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.