Fitch Ratings Places Enersis on Rating Watch Negative.

Business Editors

CHICAGO--(BUSINESS WIRE)--Feb. 6, 2002

Fitch Ratings has placed the 'A-' local and foreign currency ratings of Enersis S.A. (Enersis) on Rating Watch Negative. The 'A-' local and foreign currency ratings of Endesa-Chile have also been placed on Rating Watch Negative. Enersis owns 60% of Endesa-Chile.

The rating action on Enersis reflects pressured financial flexibility, a condition exacerbated by the prospective reduction of consolidated EBITDA and cash flow stemming from the crisis in Argentina. Rating pressure is also a result of recent sovereign deterioration in Colombia, Fitch rated 'BB', and Brazil, Fitch rated 'BB-' with a negative rating outlook. The Rating Watch status will be resolved in the near term.

Enersis' investments in Argentina have been acutely affected by recent events in the country, most notably the devaluation of the peso, 'pesofication' and freezing of regulated tariffs. Under current conditions, tariff increases to offset the costs of devaluation are highly unlikely which will pressure credit quality of Enersis' 65%-owned Empresa Distribuidora Sur S.A. (Edesur) and essentially eliminate cash flow contribution to Enersis. Edesur, as well as other affected public service companies, are expected to try to renegotiate their concession agreements to provide some sort of compensation for the government's actions. The result and timing of the negotiations is uncertain, yet the ultimate impact is expected to pressure credit quality at Enersis.

Edesur's 2001 annualized EBITDA is estimated at approximately $250 million, or 19% of consolidated EBITDA for Enersis; all of Argentina is expected to account for approximately 22% of Enersis' consolidated EBITDA. Edesur itself is a very strong electricity distribution company with EBITDA-to-interest of 15.0x and should manage to cover its own debt service barring government transfer or convertibility controls. However, the cash benefit to Enersis outside of Argentina will be unrealized in the near term. Longer term, EBITDA contribution will be affected due to the extreme difficulty of obtaining tariff increases in the current political and economic environment in Argentina.

The lower EBITDA and elimination of dividends from Enersis and Endesa-Chile's Argentine subsidiaries adversely affects the companies' abilities to meet their previously estimated targets for interest coverage. Current coverage levels are weak for the 'A-' rating category.

Positively, Enersis' Chilean operations are performing well and contribute the majority of consolidated EBITDA, currently 42%, and is likely to increase to 48% as demand growth continues and Argentine contribution declines. Enersis is able to service its Chilean debt without cash flow from its foreign subsidiaries. However, such dividend cash flow provides diversification benefits that add strength to the company's consolidated credit profile and is a source of cash to reduce consolidated debt levels. Operations in Colombia and Brazil continue to improve as well. But, recent sovereign rating deterioration in Colombia and Brazil and the crisis in Argentina increase the risk level of cash flow from investments in these companies and temper the diversification gains.

Both Enersis and Endesa-Chile benefit from the ownership of Endesa-Spain (Fitch rated 'A+'). Future equity increases at both Enersis and Endesa-Chile will depend on additional investment from Endesa-Spain to maintain its level of ownership in the South American companies. Eventual conversion of approximately US$1.5 billion in subordinated debt from Endesa-Spain is expected to be a primary source of additional equity for Enersis going forward, but without the cash flow benefit. Enersis' credit fundamentals are expected to be supported over the intermediate to long term from implementation of Project Genesis, continued overall growth in electricity demand throughout Latin America and debt reductions, although realization of previously identified targets may be delayed due to expected lower future cash flow from Argentina.

Enersis is the largest private electricity distribution group in Latin America. The company has varying ownership interests in electric distribution companies in Argentina, Brazil, Chile, Colombia and Peru; electric generating companies in Argentina, Brazil, Chile, Colombia and Peru; and electric utility-related service companies. Enersis is 65%-owned by Endesa-Spain.

Endesa-Chile is the largest electricity generation company in Chile and owns and operates approximately 48% of the country's total generating capacity. Endesa-Spain is Spain's largest electrical utility, which holds existing energy investments in South America. All three companies have direct and indirect stakes in companies located in Chile, Argentina, Colombia, Brazil and Peru.