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Rating Action:

Moody's affirms Colbun ratings; assigns Baa2 rating to proposed $500 million notes

20 Feb 2020

New York, February 20, 2020 -- Moody's Investors Service ("Moody's") has affirmed Colbun S.A.'s Baa2 issuer and senior unsecured ratings (Colbun, Baa2 stable). At the same time, it assigned Baa2 to its proposed up to $500 million senior unsecured notes due in ten to thirty years, depending on market conditions. The outlook is stable.

The proceeds of the proposed notes will be primarily used to refinance a portion of the company's 4.5% senior unsecured notes due 2024, subject to a tender offer, with eventual remaining proceeds to fund capital expenses on new projects.

The assigned rating is based on preliminary documentation. Moody's does not anticipate changes in the main conditions of the offering. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.

Affirmations:

..Issuer: Colbun S.A.

Issuer rating: affirmed Baa2

Senior unsecured rating: affirmed Baa2

Assignments:

..Issuer: Colbun S.A.

....Senior Unsecured Regular Bonds/Debenture, assigned Baa2

Outlook Action:

Outlook: Remains Stable

RATINGS RATIONALE

Affirmation of Colbun's issuer and senior unsecured ratings reflects its size and importance within the power generation market in Chile (Government of Chile, A1 stable), adequate commercial policy and strong credit metrics, with interest coverage ratios and CFO pre W/C to debt expected to range between 6.5x -- 7.5x and 26% -- 30% over the next three years. The company's cash flow visibility is enhanced by fuel resource diversification, and a long-term re-gasification capacity and supply contract to feed its thermal plants. Exposure to carbon transition risk is moderate. The company has substantial investments in wind and solar energy over the next 10 years that may double its installed capacity. The company benefits from ample liquidity and the transaction would further extend its already long-dated debt maturity profile.

Our credit view recognizes Colbun's relevance to the Chilean market as the third-largest energy generator in the country, with a market share of around 15-17%. The company maintains a large scale, with 3,811 MW of installed capacity in Chile and total energy generation of 12.0 Terawatt-hours (TWh) in 2019.

Colbun has secured an adequate contracted position. The company has signed contracts for delivery of a maximum energy volume of up to 13 TWh per year in 2020, which is above its average historical position (2012-2018) of around 11 TWh While these contracts contain fixed and variable volume commitments, they provide for fixed real prices, adjusted by inflation and/or the cost of fuel. This has allowed the company to maintain a healthy EBITDA margin averaging 42% over the past three years. The contracts for the supply of natural gas have contributed to this during this period. Around 30% of the company's committed PPAs expire by 2023. The company is focused on increasing its share of non- regulated customers.

The rating affirmation considers the effects of the recent tariff stabilization regime introduced by the government in late 2019 as negative, but not material to Colbun's credit profile. Preliminary estimates indicate the immediate impact in cash flows is less than $150 million. The short-term financial effect on cash flows is mitigated by the currently strong liquidity levels and generally low leverage. The government has laid out a plan that involves eventual compensation in the long-term, but these one-off regulatory changes could potentially have longer-term negative credit implications should policy deviate from the established plan or if further changes are introduced. That would raise concerns over the predictability of the regulatory regimes as a direct result of higher exposure to social risks. For further details on the tariff stabilization mechanism, see (Power generation -- Chile: Proposed legislation to freeze electricity tariffs is credit negative for power generators).

In addition to continued interest in expanding within the region to countries with stable regulatory environments, the company has now refocused its growth strategy on Chile, with a pipeline of 3,100 MW of installed capacity in wind and solar projects. The business case is enhanced by the continued decline in development costs and increasing technological efficiencies that are likely to increase generation output per installed capacity, as well as a broader generation policy direction on the part of the government tied to carbon regulation. The Diego de Almagro solar project, with 200 MW in installed capacity, and the Horizonte wind project, with 607 MW, are two of the more advanced projects, and encompass a total capital investment of approximately $800 million between 2020 and 2024, which we expect will require very modest debt needs in light of the company's substantial cash position and slightly positive free cash flow generation.

Colbun's financial profile has improved in light of its more balanced commercial policy and operating diversification. Overall, its Moody's-adjusted debt balance peaked at $2.2 billion in 2015, but declined to $1.7 billion as of December 2019. Moody's-adjusted debt/EBITDA decreased to 2.5x as of December 2019 from 3.5x in 2014. We expect Colbun's leveraged to increase slightly to 2.6x -- 2.8x over the next three years as the company manages its generation fleet to lower contracted sales in 2020 and 2021.

Colbun continues to maintain a very strong liquidity position, with a cash balance of US$797 million as of December 2019, and short-term obligations of US$82 million. This strong cash balance is already net of extraordinary dividends paid during the year, with an actual payout of 150% of net income (above the target 50% payout). This cash balance is present to support potential acquisitions/investments in accordance with the company's growth strategy. The proposed liability management strategy will further lengthen the company's already healthy debt profile, but also provide debt service savings.

The rating assigned to the proposed issuance of up to $500 million notes due in ten to thirty years reflects its senior unsecured nature, and the limited impact in consolidated leverage assuming approximately US$150 million of net notes proceeds will be used for capital expenses. The indenture includes the typical limitations on the occurrence of secured financing or engaging in sale and leaseback transactions and does not contain financial covenants. Events of default include the default on indebtedness in excess of $40 million by any subsidiary.

RATING OUTLOOK

The stable outlook reflects our expectation that Colbun will continue to successfully execute its commercial policy by focusing on extending its contracted position. We also expect the company to manage any eventual acquisition prudently, thereby maintaining its strong credit metrics.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The rating could experience positive momentum should Colbun further diversify its operating profile through expansion into other markets that have stable, creditor-friendly regulatory frameworks. The rating could also be upgraded if the company's contracted profile is extended further at average price levels, which can allow its credit metrics to reach interest coverage above 8.0x, CFO pre-WC-to-debt above 35% and retained cash flow-to-debt above 15%.

Downward rating pressure could emerge if the company is unable to renew its expiring power purchase agreements (PPAs) at adequate pricing levels to preserve its low leverage profile, the company were to perform large acquisitions that are fully funded with debt, or there is a significant deterioration in the company's cash/liquidity position, with no committed credit facilities. In addition, the company's ratings could be downgraded upon increase in leverage, such that interest coverage remains below 5.0x on a sustained basis; CFO pre-WC/debt is below 20% on a sustained basis; or retained cash flow/debt is below 10% on a sustained basis.

The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Santiago, Chile, Colbun is an operational holding with assets in Chile (Government of Chile, A1 stable) and Peru (Government of Peru, A3 stable), engaged in the power generation and transmission sectors. As of December 2019, the company had a total combined installed capacity of 3,811 megawatts (MW), of which 57% is thermal and 42% is composed of renewable power plants. As of the same date, the company had 937 kilometers of transmission lines. The company is controlled by the Matte Group, which has investments in the energy, financial, forestry, real estate and telecom sectors. In 2019, the company generated net revenue and Moody's-adjusted EBITDA of $1,487 million and $693 million, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Bernardo Costa
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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