Fitch Ratings affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Empresa Electrica Cochrane SpA (Cochrane) at 'BBB-', and affirmed the National Long-Term Rating at 'A+(cl)'.

Rating actions affect the international and domestic senior secured notes due 2027 and 2040, respectively. The Rating Outlook is Stable.

Cochrane's ratings reflect the solid structure of its long-term commercial agreements with strong counterparties, which allow the company to generate predictable cash flows. The company's power purchase agreements (PPAs) have an average life of 12 years and provide stable, fixed monthly capacity charge payments. The PPAs also allow for the pass-through of variable costs to counterparties.

Key Rating Drivers

Strong PPAs: Cochrane's long-term commercial agreements with competitive Chilean miners and fertilizer producers result in predictable cash flows. The PPAs average 12 years with stable, fixed monthly capacity charge structures and allow for the full pass-through of variable costs, including fuel and nonfuel costs, and certain regulation changes. Cochrane is 100% contracted with the PPA structure until 2030, then goes to 79% until 2034 and 26% in 2037.

Stable Cash Flows: Fitch expects Cochrane to generate positive FCF, derived from its PPAs stable cash flows. The company reported positive FCF of USD92 million in LTM March 2023, an increase from the USD83 million registered in December 2022 mainly due higher energy margin derived from the increase in coal prices and inflationary update in Cochrane's fixed charges. Going forward, Fitch estimates a positive FCF through 2023-2026 explained by lower maintenance capex in the range USD3 million-USD4 million, USD58 million in dividends during 2023, increasing to USD100 million in 2026, as the company continues its amortizing schedule.

Leverage to Decline: Cochrane's international notes started amortizing during 2020, period where the company registered a total debt to EBITDA of 5.0x. Expected EBITDA leverage is 3.6x by 2023 and around 3.0x during 2024-2026, continuing the deleverage trajectory over the rating horizon. With the combination of fixed capacity payments derived from the company's PPAs and the amortizing structure of the loan, debt service coverage ratio should lead to a fairly stable levels averaging 1.5x during the life of the loan. In addition, Cochrane's interest coverage should average 4.7x between 2023-2026.

Ratings Equalized with Parent: Cochrane benefits from the ring-fenced shareholder agreement between AES Andes (57% ownership) and Daelin Energy (40% ownership). In 2021, Toesca bought 50% of the economic rights of AES Andes shares for USD113 million. The shareholders agreement establishes strategic priorities and financial policies, including decisions related to asset sales, sale or increase of capital, change of management structure, annual budget, O&M expenses above 10% of the approved budget, related party agreements greater than USD1 million, claims or arbitration greater than USD5 million, and approval for any dividend or intercompany loan payment. Cochrane is overseen by the board of directors with three AES Andes and two Daelin directors, with a chairman from AES Andes.

Derivation Summary

Cochrane's contracted position is unique among Chilean and regional peers with long-term contracts that offer cash flow stability. The company have PPAs concentrated with nonregulated clients, with mining sector off-takers accounting for 100% of capacity. Cochrane benefits from Daelin Energy's minority interest, which adds its experienced management team to Cochrane's decision-making processes, enhancing the strong shareholder agreement with AES Andes.

Cochrane has no exposure to hydrological risks as generation assets are concentrated in thermal units, while Enel Generacion Chile S.A. (BBB+/Stable) and Colbun S.A. (BBB+/Stable) present an evenly distributed generation mix between hydro and thermal. AES Andes is mainly concentrated on thermal units and has a small portion of hydroelectricity generation.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Total energy sales between 1,700 and 2,000 gigawatt hours per year during 2023-2026;

Maintenance capex between USD3 million and USD4 million during 2023-2026;

Fixed monthly charges in place;

Thermal coal (Australia Newcastle) at USD190 per ton during 2023, USD90 per ton in 2024, USD83 per ton during 2025 and USD63 in 2026;

Dividend distributions of USD58 million during 2023, increasing to USD100 million by 2026;

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A positive rating action is unlikely in the short to medium term, as the ratings are equalized with its parent AES Andes, and Cochrane is a single coal unit that has a limited time frame given the decarbonization process in the country.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A change in strategy regarding leverage, dividends, indebtedness and capex;

Acceleration of decarbonization legislation that would impact cash flow, liquidity and leverage;

A general deterioration in the credit quality of the off-takers or shareholders;

A material change in the company's commercial strategy, with new PPAs presenting dissimilar conditions compared with its current contracted structure.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Fitch expects Cochrane to maintain adequate liquidity levels to fund its financial needs supported by own cash flow generation, cash on hand and a comfortable debt amortization profile after liability management. Cash on hand reported as of March 2023 was USD46 million, higher compared with the USD25 million by the end of 2022.

Issuer Profile

Cochrane is a coal-based power plant of 550MW of installed capacity located in the north of Chile, with two generation units, one substation, 153km transmission lines and 20MW battery energy storage system. AES Andes owns 57% of Cochrane's shares.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Empresa Electrica Cochrane SpA has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to its total reliability on coal for energy generation. Fitch estimates it has a negative impact on the company's credit profile, in conjunction with others factors, following the agreement between the Chilean government and generation companies to completely phase-out coal generation by 2040.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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