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Rating Action:

Moody's Assigns Baa3 Rating to Angamos' Proposed Sr Sec Notes Issuance; Outlook Stable

12 Nov 2014

Up to $800 Million of Debt Securities Affected

New York, November 12, 2014 -- Moody's Investors Service assigned today a Baa3 senior secured rating to the proposed issuance of up to US$800 million of 15-year senior secured notes due 2029 by Empresa Electrica Angamos S.A. (Angamos). The notes will fully amortize in 23 equal semi-annual installments following a three and half year grace period that is scheduled to expire mid 2018. This is a first time rating on Angamos. The rating outlook is stable.

Proceeds raised in connection with the offering will be largely used to repay the outstanding balance of around US$763 million under Angamos' project finance bank credit facility as well as the associated costs that are expected to arise in connection with the transaction and unwinding of the related interest rate swap agreement.

RATINGS RATIONALE

The Baa3 rating assigned to the senior secured notes is largely driven by Angamos' highly visible cash flows which are underpinned by the contractual arrangements under three long-term Power Purchase Agreements (PPA) with creditworthy counterparties. Assuming satisfactory operational performance, fixed and variable charges under the PPAs have been sized to fully cover Angamos' actual costs, including its fuel costs and debt service. They also include a monthly inflation adjustment mechanism while also allowing for the recovery of additional costs resulting from certain changes in the applicable laws. Therefore, Angamos' risks are largely limited to meeting certain performance requirements. That said, Angamos also benefits under the PPAs from an Energy Allowance mechanism that allows the issuer to pass-through to the off-takers the marginal costs of procuring power in the spot market during the plant's annual maintenance period (20 days per unit), the quinquennial major overhaul period (50 days per unit) as well as to certain extend forced outages, a credit positive. Moody's also notes that the fixed charges payable under the PPAs are subject to certain pre-defined discount rates when the downtime days significantly exceed the annual maintenance period. However, the Baa3 rating assumes that despite these possible discounts, Angamos will be able to generate enough cash flows to be able to service its debt at all times, including principal repayments starting in 2018. This assumption is predicated on the plant's satisfactory operating performance since its commissioning in 2011, its proven technology and AES Gener's good track-record as operator of coal-fired facilities as well as the issuer's business interruption insurance coverage . The Baa3 rating also incorporates Moody's understanding that the contractual arrangements keep all parties' interests aligned including, for example, the coal procurement auction mechanisms.

Angamos' rating is tempered by the single asset nature of its operation, as well as its exposure to the Chilean mining industry's related volatility. That said, Moody's acknowledges the good credit quality of Angamos' counterparties. Currently, its two primary off-takers are the largest copper producer in the world, Minera Escondida Limitada (MEL; Baa1 stable), and Minera Spence S.A. (not rated; no outstanding indebtedness) which are subsidiaries of BHP Billiton (A1 stable). The rating further reflects that Angamos' cash flows will remain somewhat exposed to the spot market until 2018 when the third PPA with Compania Minera Teck Quebrada Blanca S.A. (QB; not rated) for up to 80MW load (equivalent to around 12% of the plant's expected output) become effective following the scheduled completion of QB's planned extension. Moody's understands that this project is facing some environmental challenges which may impact its completion; however, Moody's rating factors that this risk has been somewhat mitigated by QB's requirement to start making its fixed charge payments in 2018. To that end, Moody's also understand that its majority shareholder, Teck Resources Ltd (Baa2 negative), has provided a US$217 million corporate guarantee covering those payment obligations over a significant portion of the notes' life, a credit positive. Moreover, Moody's acknowledges Angamos' strong competitive position in the dispatch curve in the Sistema Interconectado del Norte Grande (SING). This also aids the issuer's cash flow generation ability as its marginal costs (that hover around US$43/MWh) compare well with the SING's marginal costs. Moody's notes that the 90MW PPA with Spence is scheduled to expire in October 2026 which is before the notes' maturity; however, the rating acknowledges that this contract is subject to an extension and that at that time only about 26% of the notes principal will remain outstanding.

The Baa3 rating is further tempered by the significant reliance of AES Gener (Baa3 stable) on the cash flows upstreamed from Angamos in the form of intercompany loans (US$135.1 million as of September 2014) as well as annual dividend distributions. Moreover, the rating also factors the absence of a committed credit facility or dedicated reserves to cover maintenance costs; however, it considers the limited investments required by Angamos given its recent commission in 2011 as well as management's commitment to maintain at all times a cash balance of at least US$30 million to be able to cope with unexpected shocks. Moody's further acknowledges that the terms of the notes limits Angamos' ability to incur additional indebtedness unless it can record for each succeeding annual period a Debt Service Coverage Ratio (DSCR) of at least 1.4x albeit this is also subject to some exceptions including new indebtedness related to the execution of a committed credit facility for up to US$50 million.

The Baa3 further incorporates Moody's expectation that Angamos' key credit metrics will remain weak for the Baa-rating category according to the guidelines provided under the Unregulated Utilities and Unregulated Power Companies methodology published in October 2014; however, the rating also anticipates that its key credit metrics will start improving significantly after Angamos starts making principal repayments under the notes in 2018 and the PPA with QB becomes effective. Moody's also expects that Angamos' cash flow generation ability will benefit from the new desalination technology that it is currently being implemented as well as from some cost savings upon the completion of the coal-fired facility of its sister company, Cochrane. While the principal payments will weaken Angamos' DSCR, the Baa3 rating assumes that the issuer's DSCR will average at least 1.4x.

The Baa3 rating also factors that the noteholders benefit from the collateral package that includes a first priority security on certain assets. It further incorporates the remote risk of non-payment during an extended period after a catastrophic event affecting Angamos' ability to operate, which is somewhat mitigated by the force majeure provisions under the PPAs as well as the coverage under Angamos' comprehensive insurance arrangement (including earthquake risk), and the eventual termination of its obligations under the PPAs after certain pre-defined periods that are standard for the industry.. Conversely, similar provisions and periods apply for the benefit of Angamos should the off-takers be affected by a force majeure, a credit positive.

The Baa3 rating further considers that the notes' issuance does not expose Angamos to foreign exchange risk as the issuer's functional currency is the US$, the same currency in which the notes are denominated.

The stable outlook reflects Moody's expectation that Angamos' operational performance will remain satisfactory in terms of availability ratios and that the progressive deleveraging with the principal repayments starting in 2018 will aid the issuer to record key credit metrics that are commensurate with the lower end of the Baa-rating category. Specifically, the company will be able to record Funds from operations (FFO) to debt and interest coverage of at least 20% and 4.2x starting in 2021.

Limited prospects exist over the medium term for an upgrade of Angamos' rating given its current exposure to the spot markets, and the weak key credit metrics, particularly during the grace period, as well as AES Gener's pressure to upstream cash flows during its heavy capital investment outlays. That said, the rating could experience positive momentum if Angamos is able to record Retained Cash flow (RCF) to debt, and interest coverage and a DSCR that exceed 20%, 6.0x and 1.5x, on a sustainable basis, respectively, for an extended period of time.

A downgrade of the rating would be triggered if Angamos' operations deteriorate significantly for an extended period of time such that it affects the visibility of its cash flows. A downgrade of the rating could be also triggered if upon expiration of the grace period Angamos' key credit metrics do not improve significantly such that they remain weak for the Baa3-rating category for an extended period of time.

The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Located in the Sistema Interconectado del Norte Grande (SING), the Angamos complex (market share of around 22% and 13.4% in terms of output and installed capacity, respectively) consists of two pulverized coal-fired units with a total gross installed capacity of around 545 MW and related facilities. They started operations in April and October 2011, respectively, with total capex of around US$1.2 billion. The complex has a 20MW battery energy storage system while it is currently changing its desalination technology to seawater reverse osmosis to enhance the plant's efficiency.

Angamos is a directly and indirectly wholly-owned subsidiary of AES Gener (Baa3 stable) which ranks as one of three largest power generation companies in Chile. For more details about AES Gener refer to the Credit Opinion available in our website.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns Baa3 Rating to Angamos' Proposed Sr Sec Notes Issuance; Outlook Stable
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