Fitch Ratings Affirms Transelec at 'A-'.

CHICAGO -- Fitch Ratings has affirmed the following ratings assigned to HQI Transelec Chile S.A. (Transelec):

-- US$465 million senior unsecured notes 'A-';

-- Foreign currency rating 'A-';

-- Local currency rating 'A-';

-- National scale rating 'AA(chl)'.

The Rating Outlook for all these ratings remains Stable.

The assigned ratings reflect Transelec's position as the dominant transmission company in Chile, its stable cash flow generation ability, low operating risk and the improved regulatory environment, since approval of the Ley Corta earlier this year. Transelec also benefits from experienced management and committed shareholders in Hydro-Quebec ((HQ), rated 'AA-' by Fitch) (89%) and International Finance Corporation (IFC) (11%), which provide Transelec with operating experience. The ratings are tempered by revenue concentration and lower average credit quality of the generation companies from which Transelec receives the majority of its revenues.

Positively for Transelec, a new short law was approved in March 2004. The new law allows Transelec to receive a return on the regulatory rate base (annual investment value of its assets, plus cost of operation, administration and maintenance, AVI plus COAM). The regulatory rate base will be defined by an external consultant every four years and discrepancies will be solved by a permanent expert panel. The Centro de Despacho Economico de Carga (CDEC) will define the rate distribution between generators and end users, eliminating the negotiation of contracts between Transelec and generators, without including injection lines. The implementation of the new law is expected to have a transition period of approximately two years.

Fitch believes the new law is expected to have long-term positive credit implications for Transelec, affording the company greater certainty in the determination of regulated transmission revenues and future investments.

Transelec has invested in several projects in the last couple of years, which are expected to improve the operational results of the company. In May 2003, Transelec acquired transmission assets located in the Sistema Interconectado del Norte Grande (SING), which are expected to increase Transelec's EBITDA by US$15 million per year. In addition, two new large projects were commissioned in 2004. The new Ancoa-Itahue transmission line started operations in February 2004 and the investments related to Ralco, Endesa-Chile's new hydroelectric plant, started operations in July 2004. Between both projects, Transelec's EBITDA is expected to increase by approximately US$16 million per year.

Through Sept. 30, 2004, Transelec reported EBITDA-to-interest expense of 2.9 times(x), net debt-to-EBITDA of 5.1x and debt-to-capital of 59%. Coverage ratios are expected to continue improving supported by increases in cash flows from the assets acquired in the SING and the new projects that started operations in 2004.

Transelec owns and operates most of the electricity transmission lines and substations of Chile's trunk transmission system in the Central Interconnected System (SIC), as well as a portion of the high-tension lines in the SING. Transelec is 89%-owned by Inversiones HQI Chile Holding Ltda, a subsidiary of Hydro-Quebec (HQ), and 11%-owned by International Finance Corporation (IFC).