Corporates

Electric-Corporate Chile Credit Analysis

Ratings
Security Class Foreign Currency IDR Local Currency IDR New Issuance (144a) due 2020 National Scale Rating (Solvency) New Bond Program (10 years) (to be inscribed) New Bond Program (30 years) (to be inscribed) Bond program N234 Series C Bond program N500 Series E Bond program N499 Series F Bond program N537 Series G, H Bond program N538 Series I Commercial Paper Program N 030 Shares IDR  Issuer default rating. Current Rating BBB BBB BBB A+(cl) A+(cl) A+(cl) A+(cl) A+(cl) A+(cl) A+(cl) A+(cl) F1+/A+(cl) Nivel 2

Colbun S.A.
Rating Rationale
x The ratings reflect Colbun S.A.s (Colbun) sound business position, which is supported by its diversified generation mix, the expected stabilization of its cash flow generation resulting from a commercial policy that has balanced its contracted position to its efficient generation portfolio, and its sound credit profile. The ratings also incorporate the companys experienced management and the proven ownership support reflected by the USD400 million equity increase in 2008. The ratings also factor in the strategic position of Colbun as the second largest electricity generator in the Central Interconnected Electric System (SIC), representing 25% of SICs installed capacity. Colbuns commercial policy is a key factor that will help stabilize its future cash flow generation. Beginning in January 2010, the company has limited its contracted volume to its efficient generation portfolio. While the new contracted position limits the cash flow downside risk under an adverse hydrological scenario, it leaves room for strong cash flow generation under favorable hydrological conditions. In addition, new long-term power purchase agreements (PPAs) that have just begun have a higher base price than historical contracts and include fuel indexation clauses related to Colbuns generation matrix, thus mitigating fuel price risk. Colbuns contracted volume will increase as new capacity comes online. Santa Marias 342-MW coal plant is under construction and is expected to begin operations in January 2011. Going forward, Fitch Ratings projects that the companys credit metrics will continue to moderately improve. The net-debt-to-EBITDA ratio is expected to be below 3.0x, and the EBITDA-to-interest ratio is expected to be above 4.5x over the medium term. Colbuns cash flow generation is expected to grow as new capacity begins to operate. The companys adequate liquidity position will be sufficient to support its manageable debt amortization schedule, working capital requirements, and finance an important portion of its capital expenditure program currently underway. Debt levels are expected to increase slightly as new projects are under construction, although credit metrics are expected to remain consistent with the assigned ratings.

Outlook
Stable

Financial Data
Colbun S.A.
(USD Mil.) IFRS 3Q09 877 238 (191) (41) Chilean GAAP 3Q08 953 126 (169) (38)

Sales EBITDA FCF Financial Expenses Cash and Marketable Securities Financial Debt Total Assets EBITDA/Financial Expenses (x) Total Net Financial Debt/EBITDA (x)

397 1,179 5,317 5.8 2.5

599 1,195 4,493 3.3 3.5

Analysts
Giovanny Grosso +562 499-3327
giovanny.grosso@fitchratings.com

Key Rating Drivers

x Continuance of a conservative business strategy, completion of the capex program within budget, and sustaining low leverage are important drivers to maintain current ratings. Unexpected movements in debt levels, liquidity, and deterioration of operating results could lead to rating actions. An important improvement in cash flow generation that could be used to pay down debt and completion of the investment program could result in a positive rating action.

Ana Paula Ares +54-11 5235-8121

ana.ares@fitchratings.com

Related Research
Applicable Criteria x Corporate Rating Nov. 24, 2009 Methodology,

Recent Developments
Over the past few years, Colbun has worked to successfully alter its commercial policy. Starting in 2010, the structure of its contract portfolio now better matches its

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generation mix. The most relevant of these contract portfolio changes are: the termination of the contract with Chilectra Distribution company (4.000 GWh/year), the start of a new long-term contract with the distribution companies Compania General de Electricidad (CGE) and SAESA (3.400 GWh), and the introduction of risk sharing mechanism with some of their customers. Due to these changes, the annual contracted volume has dropped to 8.800 GWh in 2010 from 10.000 GWh in 2009. Almost half of the contracts are set at a fixed price or include adjustment clauses that are indexed to the Consumer Price Index (CPI). Additionally, 25% of the contact portfolio is indexed to marginal costs for the first two years, reducing energy price exposure under dry hydrology scenarios and to CPI thereafter. The remaining contracts will be indexed to diesel oil and coal prices. In 2011, contractual commitments will increase to 10.600 GWh/year as the new 342-MW (approximately 2.800 GWh/year) Santa Maria coal plant starts operations in early 2011. Approximately 2.000 GWh of Colbuns contracts have indexation clauses related to coal prices. In September 2009, Colbun received environmental approval for the Angostura Hydroelectric project of approximately 316 MW. The company is currently in the bidding process and construction is expected to start in the first quarter of 2010. In September 2009, Colbun and Codelco signed a memorandum of understanding for two new PPAs for a total amount starting in 2013 of 328 MW, increasing to 510 MW by January 2015. The first 160 MW will be supplied with the existing generation portfolio, and the remaining capacity will be served by the development of the Santa Maria coal complex. It remains to be seen if the contracts will be signed.

Debt and Liquidity Structure

Colbuns liquidity position is strong with USD397 million of cash and marketable securities as of Sept. 30, 2009. The company has a manageable long-term debt amortization schedule with only USD10 million coming due within the next 12 months and USD130 million coming due in 2011 (before the new USD400 million debt issuance). The company also has additional access to liquidity in the form of a committed backup facility with local banks of approximately USD255 million. In 2009 Colbun was active in the domestic capital market through the issuance of commercial papers for USD39 million and a revolving bank credit facility for USD63.5 million. In 2008 the company benefited from a USD400 million capital contribution, the refinancing of USD400 million of bank loans (including a two-year grace period and an extension for the amortization schedule), and the issuance of local bonds for USD280 million. As of September 2009, the company has a gross financial debt of USD1.179 million. Colbuns debt is composed of USD481 million in bank loans and USD693 million in local bonds. The most important long-term loans are the syndicated loans with BBVA BANCOMER (USD400 million), which includes five equal bi-yearly amortizations from August 2011, and Corpbanca (USD81 million) with four annual payments from January 2011.

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Colbun's Debt Amortization Schedule
Bancos 350 300 250 200 150 100 50 0 (USD Mil.) Bonos

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Colbun.

Financial Profile
Through September 2009, Colbuns operational results and margins have continued to strengthen as a result of: i) a lower contracted position that is better correlated to the portion of the companys efficient generation mix; ii) normal hydrological conditions; iii) an important fuel price reduction; and iv) lower spot energy prices as a result of new efficient capacity and fuel diversification added to the system; Colbun was a net purchaser in the spot market. Colbuns EBITDA increased to USD330 million for the LTM ended September 2009, a significant improvement compared to the USD218 million at year-end December 2008. Net-debt-to-EBITDA coverage has improved to 2.5x, compared to 3.5x, for the same periods, respectively. Debt levels remain stable at USD1.2 billion. Fitch estimates credit protection measures will continue to strengthen based on the new commercial profile and the start of operations of the new generation plants. Colbun has a large capex program of nearly USD1.2 billion expected between 2010 and 2013. The program is expected to be funded primarily with balance-sheet cash, future cash flow generation, and a moderate increase in debt levels in 2010. This capex will further improve its fuel generation mix, reducing the companys hydrological and energy cost risk. Key projects include a 342-MW coal plant (Santa Maria, Unit 1),estimated to begin operations at the beginning of 2011, and two run-of-the-river hydro units with an installed capacity of 150 MW (San Pedro) and 316 MW (Angostura). San Pedro and Angostura should start operations by 2012 and 2013, respectively.

Company Profile
Colbun is the second largest electricity generator in Chiles SIC, with 2.615 MW of installed capacity (48% hydro generated and 52% thermal generated capacity). The companys principal shareholders are the Matte Group (49.2%), the Angelini group (9.6%), and various pension funds (12.4%). The company also owns 824 km of transmission lines used to distribute the energy produced by the generation plants, and in some cases to supply clients. Additionally, Colbun shares ownership of a 130 km gas pipeline, which supplies its Nehuenco unit.

Strategy
Starting in 2010, Colbuns conservative commercial policies will begin to take effect as certain contracts expire and new contracts start. The maximum contracted volumes will be based on the expected energy generation Colbun can achieve during a low hydrological season, and the contracts will include indexation clauses that match the different types of generation (i.e. thermal, hydro). The company has been reducing its contracted levels, thus

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lowering its exposure to spot market purchases and production based on expensive fuels during periods of restricted natural gas supply and/or low hydrology. Colbun has renegotiated its sales contracts for these to reflect their current and future operational cost structure, in order to minimize the volatility in production costs.

Contracts by Type of Indexation

(%)   Node Pricea Fix/CPI Coal/Diesel Marginal Cost Total
a

2010 10 47 18 25 100

2011 7 53 16 24 100

2012 8 63 25 4 100

2013 7 52 23 19 100

2014 5 48 24 23 100

Node Price is the price of energy provided to regulated customers. It is based on an average of the expected spot price of the next 48 months. CPI  Consumer price index. Source: Colbun.

Operations
Colbun has hydroelectric and thermoelectric generation. The company is a relevant player in the Chilean generation market, with a current installed capacity close to 25% (2.615 MW) of the total installed capacity in the SIC (9.337 MW). Colbun produced 10.606 GW in 2008. Since 2006, Colbun has been adding capacity and improving their facilities by adapting their thermoelectric plants to have a flexible fuel supply. Their capital expenditures have amounted to USD794 million with their main investment, Santa Maria (350 MW) coal plant, currently under construction.

Generating Centrals  2009

Hydro Colbun Canutillar Machicura Rucue Aconcagua Complex Quilleco Carena Chiburgo San Ignacio Hydro Subtotal Thermal Nehuenco 1 Nehuenco 2 Nehuenco 3 Candelaria 1 Candelaria 2 Antilhue Los Pinos Thermal Subtotal Total
Source: Colbun.

Type Reservoir Reservoir Reservoir Pass Through Pass Through Pass Through Pass Through Pass Through Pass Through

Type Natural Natural Natural Natural Natural Diesel Diesel

Gas/Diesel Gas/Diesel Gas/Diesel Gas/Diesel Gas/Diesel

Industry Analysis

Max. Cap. (MW) 474 172 95 178 213 71 9 19 37 1,268 Max. Cap. (MW) 368 398 108 133 137 103 100 1,347 2,615

The Chilean power sectors credit trend is expected to continue improving. Liquidity continues to be strong as the sector faces low refinancing needs and has a manageable maturity profile. Local capital markets have supported the financing of the sector. Efforts continue to be made to increase power generation capacity and move towards the countrys long-term selfsufficiency with important capacity additions between 2009 and 2012. Near-term expansions are focused on thermal plants operating with coal, liquefied natural gas (LNG) and diesel, which should provide long-term stability to energy prices and improve the local generation matrix. Long-term contracts that resulted from the power auctions and will start up in 2010 will further contribute to energy price stabilization. In addition, the start up of the Quintero LNG facility in the SIC is expected to provide some relief to thermal generators following the curtailment of natural gas imports from Argentina since 2004. In 2010, supply demand tightness will still be influenced by the rainy season, although reservoirs are recuperating to historical average levels. Marginal prices have been going down substantially, being set by LNG generation prices.

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In Fitchs opinion, the power industry is well situated to finance the projected increase in capital expenditures for new generation projects. The solid track record of the individual companies (their vast experience and adequate financial profiles are reflected in their investment grade ratings) combines with a strong local financial market, which has been characterized by high liquidity and eagerness to invest in the energy sector over the past few years. Moreover, the industrys well-established regulatory framework, combined with the long-term nature of the supply contracts signed with distribution companies, should allow generators to readily raise funds for their investments. The incorporation of LNG in the energy matrix should provide for a more stable and diversified natural gas supply, allowing companies to switch their combined cycles from diesel back to lower cost natural gas. This should result in a decline in energy prices, although at higher levels than those prior to the crisis. Chile has been promoting renewable energy investment; however, it faces many challenges in achieving renewable energy capacity additions, including environmental considerations, cost effectiveness of renewable energy, consistency of energy dispatch, and proper incentive to make renewable energy economically feasible. Chilean generators are required to procure 5% of their contracted energy from nonconventional renewable energy sources beginning in 2010. These renewable energy requirements will escalate by 0.55% annually until reaching the 15% goal in 2024. Although the law requires this capacity be built, renewable generation projects are limited in their ability to be economically competitive with conventional energy. Colbun has been an active investor of renewable energy and nonconventional renewable energy such as mini-hydroelectric or run-of-the-river capacity. It is expected to start operations of San Clemente (5 MW), a mini-hydroelectric power project, in March 2010.

Electricity Prices
Following the energy price escalation in 20072008 as a result of unavailability of Argentinean natural gas and dry/normal to dry hydro conditions, energy prices are expected to stabilize in 2010. Currently, lower growth in expected demand combined with better hydrological conditions and the introduction of new coal plants and LNG as a new fuel source in the system have lowered the spot prices to around USD70/MWh. It is expected that spot prices will be set by LNG generation in the next couple of years. The implementation of the Ley Corta II in 2005 (The short Law II) requires auctions for energy supplies to regulated users in long term contracts. The contacts are allowed to have indexation clauses, and the node price has gradually increased, partly compensating for generators higher marginal costs. For the SIC, Chiles largest energy distribution system, electricity prices increased substantially between below USD50 per MWh before 2005 and USD109 per MWh (SIC) in September 2009. Since 2010, most of the energy supply to regulated clients will have a price based on bilateral contracts assign through previous bidding processes.

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SIC's Energy Spot Prices vs. Node Prices
Energy Node Price Alto Jahuel (USD/MWh) Energy Spot Price Alto Jahuel (USD/MWh) (USD/MWh)

400 350 300 250 200 150 100 50 0

1/96

1/97

1/98

1/99

1/00

1/01

1/02

1/03

1/04

1/05

1/06

1/07

1/08

1/09

SIC The Central Interconnected Electric System. Source: Fitch.

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Financial Summary  Colbun S.A.
(USD Mil.) Period-End Exchange Rate   550.36 IFRS 9/30/09 238 27.2 N.A. (21.8) 6 N.A. 5.8 2.5 N.A. (1.6) 1.6 0.6 N.A. 3.7 2.5 4.7 5.9 5,317 397 70 1,109 1,179 1,179 3,370 4,549 N.A. N.A. 260 (429) (22) (191) 1 (30) 32 0 (7) (194) 877 (8.0) 147 (41) 155 551.31 636.45 Chilean GAAP 2008 218 19.2 5.8 (13.2) 1.8 4.3 4.4 3.1 4.3 (1.4) 5.9 0.2 5.2 5.1 2.7 5.0 1.9 4,028 522 21 1,090 1,111 1,111 2,546 3,656 164 (117) 47 (194) (3) (150) 1 (4) 253 313 (10) 385 1137 (6.6) 106 (50) 45 496.89 532.39

9/30/08 126 13.3 3.2 (17.7) (0.6) 2.5 3.3 2.3 2.5 (2.3) 5.7 (0.3) 9.3 7.1 3.5 4.9 1.9 4,493 599 23 1,173 1,195 1,195 2,820 4,015 58 (91) (33) (132) (4) (169) (1) 0 296 355 (16) 445 953 N.A. 31 (38) (12)

2007 20 1.6 (2.9) (42.5) (3.8) (2.8) 0.5 0.2 (2.8) (5.7) (3.8) (0.9) (8.7) 44.6 36.7 5.2 5.5 3,927 156 49 835 883 883 2,574 3,457 (138) (57) (195) (225) (97) (517) (18) (2) 325 0 (0) (232) 1218 62.4 (106) (36) (94)

2006 444 59.2 15.2 30.6 12.1 14.0 14.3 11.2 14.0 6.5 15.0 4.0 1.2 1.2 0.4 5.7 1.7 3,247 335 9 510 518 518 2,359 2,878 405 4 410 (103) (78) 229 (27) 0 (61) 0 0 144 750 45.5 338 (31) 275

Profitability
Operating EBITDA Operating EBITDA Margin (%) Funds from Operations Return on Adjusted Capital (%) Free Cash Flow Margin (%) Return on Average Equity (%)

Coverage (x)
FFO Interest Coverage Operating EBITDA/Gross Interest Expense Operating EBITDA/Debt Service Coverage FFO Fixed-Charge Coverage FCF Debt-Service Coverage (Free Cash Flow + Cash)/Debt Service Coverage Cash Flow from Operations/Capital Expenditures

Capital Structure and Leverage (x)

FFO Adjusted Leverage Total Debt with Equity Credit/Operating EBITDA Total Net Debt with Equity Credit/Operating EBITDA Implied Cost of Funds Short-Term Debt/Total Debt

Balance Sheet
Total Assets Cash and Marketable Securities Short-Term Debt Long-Term Debt Total Debt Total Adjusted Debt with Equity Credit Total Equity Total Adjusted Capital

Cash Flow
Funds from Operations Change in Working Capital Cash Flow from Operations Capital Expenditures Dividends Free Cash Flow Net Acquisitions and Divestitures Other Investments, Net Net Debt Proceeds Net Equity Proceeds Other, Financing Activities Total Change in Cash

Income Statement
Net Revenue Revenue Growth (%) Operating EBIT Gross Interest Expense Net Income
Source: Fitch and Colbun.

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Colbun S.A.

January 13, 2010