Celeo Redes Operacion Chile S.A. · Celeo Redes Operacion Chile S.A. Update to Key Credit Factors Summary Celeo Redes Operacion S.A.’s (Celeo: Baa2 stable) credit quality reflects

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION12 July 2018

Update

RATINGS

Celeo Redes Operacion Chile S.A.Domicile Chile

Long Term Rating Baa2

Type Senior Secured - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Analyst Contacts

Natividad Martel,CFA

+1.212.553.4561

VP-Senior [email protected]

Adena Schmidt +1.212.553.6871Associate [email protected]

Daniela Cuan +54.115.129.2617VP-Senior [email protected]

Alejandro Olivo +1.212.553.3837Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Celeo Redes Operacion Chile S.A.Update to Key Credit Factors

SummaryCeleo Redes Operacion S.A.’s (Celeo: Baa2 stable) credit quality reflects the low business riskand satisfactory operational performance of its transmission projects in Chile: Alto JahuelTransmisora de Energia S.A. (AJTE 1 and AJTE 2) as well as Charrua Transmisora de EnergiaS.A. (CHATE). CHATE and AJTE jointly and severally guarantee Celeo’s 5.2% $379 millionsenior secured US$ 144/Reg S Notes and 3.35% UF5.4 million Unidades de Fomento (UF)Notes (currently equal to around US$231 million).

Celeo's credit quality incorporates the visibility of cash flows driven by the availability basedrevenues of AJTE 1 and CHATE (around 80% of the revenues) over 20-years, until 2035 and2037, called fixed project revenues. It also factors in our expectation of credit supportive tariffreviews of AJTE 2’s cash flows (starting in 2020) as well as AJTE 1 and CHATE (starting in2035 and 2040), also called resettable revenues. The predictability of cash flows is supportedby the projects’ satisfactory counterparty-risk exposure and the natural hedge that resultsfrom the tariffs underlying indexation formulas and the debt currency breakdown (US$around 62% and UF 38%). The credit quality also considers Celeo’s 3-month O&M reserveaccount.

Celeo’s credit quality is tempered by the high leverage albeit we acknowledge the debtamortization profile targets a minimum 1.25x DSCR for cash flows subject to fixed tariffs(that is, for AJTE 1 pre-2035 and CHATE pre-2037) and 1.35x DSCR for cash flows subjectto resettable tariffs (that is, AJTE 2 starting in 2020 and AJTE 1/CHATE after 2035/2037,respectively). The credit quality is further constrained by the long-term uncertainty regardingthe value of the projects’ asset base used in setting tariffs, Value of Investments (VI). Thisincreases credit risk during the final ten years of the 2047 Notes. However, our analysisconsiders that the break-even analysis allows for a reduction of at least 20% in the projectedVI at which point Celeo will have repaid nearly 40% of the total debt (considering theinflation-indexed amounts due under the UF-Notes) after the expiration of the 20-year fixedtariff period of AJTE 1 (2035) and CHATE (2037). We also consider the long useful life ofthese assets that are held in perpetuity while we assume that 500 KV transmission lines willremain key pieces of infrastructure in the Chilean transmission system.

The credit category factors in that Celeo remains liable for the compliance obligationsresulting from its third transmission project Diego de Almagro Transmisora de Energia S.A.(DATE) Project Decree with the Chilean regulatory authorities, which remains outside ofthe scope of Notes. However, we also consider that Celeo Redes Operation Chile S.A. hasentered into a back-to-back agreement with Celeo Redes S.L., the Sponsor that co-owned

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

by Elecnor S.A. (unrated; 51%) and the Dutch pension plan Algemene Pensioen Groep N.V. (APG, 49%).

Credit strengths

» Low business risk and long-term useful life of transmission assets held in perpetuity

» Credit supportive regulatory environment

» Contractual terms and satisfactory counterparty risk underpin predictability of cash flows

Credit challenges

» Limited construction risk exposure

» High leverage but gradual reduction amid scheduled debt amortization

» Long-term cash flow uncertainty after the expiration of the 20-year fixed tariff period until Notes maturity in 2047

Rating outlookThe stable outlook assumes that AJTE’s and CHATE’s high availability such that Celeo’s financial performance will be generallyconsistent with our base case expectations, which assume a DSCR of at least 1.25x DSCR during the fixed revenues period and 1.35xafter 2037, when the tariff of all projects will become resettable. The stable outlook also assumes Celeo’s construction risk exposure willremain limited and that the back-to-back agreement with Celeo Redes S.L. will insulate Celeo’s profile from challenges that could resultif DATE fails to meet its long stop date (November 2019).

Factors that could lead to an upgrade

» An upgrade of the rating is unlikely over the near-to-medium term given Celeo’s high initial leverage. Over the long-term, strongerthan expected financial metrics that result in a DSCR exceeding 1.40x consistently, would exert upward rating pressure.

Factors that could lead to a downgrade

» The rating could experience negative pressure if AJTE’s and/or CHATE’s operational performance deteriorates, if Celeo’s financialperformance is materially different than anticipated, such that the Fixed and Resettable DSCRs remain below 1.25x and 1.35x,respectively, on a sustainable basis.

ProfileHeadquartered in Santiago, Chile, Celeo Redes Operation Chile S.A. (Celeo) holds a 99.99% direct interest stake in the 500 KVtransmission projects: Alto Jahuel Transmisora de Energia S.A. (AJTE) and Charrua Transmisora de Energia S.A. (CHATE). As illustratedin Exhibit 3 Celeo’s holding parent company, Celeo Redes Chile Limitada, is 99.99% owned by Celeo Redes, SL (Celeo Redes Spain), thesponsor.

According to the back-to-back agreement that Celeo Redes Spain executed with Celeo, the sponsor is jointly and severally liable withthe issuer for the compliance of all obligations resulting from the Project Decree to build and operate the 2x200KV transmission assetsDiego de Almagro Transmisora de Energia S.A. (DATE). Our assessment assumes that DATE will remain an unrestricted subsidiary ofCeleo until the completion of the project (expected in April 2019). That said, if certain conditions are met DATE could be incorporatedto the scope of the transaction.

Celeo Redes Spain is an indirect subsidiary of the Dutch pension fund Algemene Pensioen Groep N.V. (APG; 49%; unrated) and ElecnorS.A. (51%; unrated), the parent company of Elecnor Chile S.A. (unrated), the Engineering, Procurement, and Construction (EPC)contractor.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 12 July 2018 Celeo Redes Operacion Chile S.A.: Update to Key Credit Factors


Exhibit 1

Celeo's simplified organizational structure

100% 100%

Spain 51% Netherlands 49%

Spain

99.99%

Chile 0.01%

100%

99.99%

0.01%

0.01%

99.99%

0.01%

Notes Issuer Unrestricted Subsidiary

Restricted Subsidiaries Issuance Guarantors

New Projects

100% AJTE

100% CHATE

100% DATE

Celeo Redes, S.L.

(Celeo Redes Spain, "Sponsor")

Celeo Redes Chile Limitada

("Parent Company")

Celeo Redes Operacion Chile S.A.

("Issuer")

Elecnor S.A. APG

("Majority Shareholder") ("Minority Shareholder")

Celeo Concesions e

Inversiones, S.L.U.APG Infrastructure Pool 2012

Source: Celeo and Moody's Investors Service

Detailed credit considerationsLOW BUSINESS RISK, CREDIT SUPPORTIVE REGULATORY ENVIRONMENT AND CONTRACTUAL TERMS UNDERPIN CASH FLOWSPREDICTABILITYCeleo’s credit quality considers that around 80% of its current revenues, AJTE 1 and CHATE, are comprised of fixed project revenues(20-year availability based fixed revenues). Upon the expiration of the projects’ underlying contractual arrangements in 2035 (AJTE 1)and 2037 (CHATE) their revenues will be subject to tariff reviews every four years, as is the case for AJTE 2’s revenues (resettable projectrevenues), which represent 20% of total revenue.

Celeo’s credit quality assumes that AJTE 2’s first tariff review in 2020 will be credit supportive. This expectation considers a historicaltrack record of positive tariff review outcomes for other transmission companies.

Our view also assumes that the implementation of the changes associated with the Transmission Bill of Law (TBL; Law No. 20.936)that was enacted in 2016, will continue smoothly. For example, starting in 2020, the tariff reviews will use the Capital Asset PricingModel (CAPM) to set the internal rate of return (IRR), subject to a 7-10% range. In contrast, the current remuneration is premised ona fixed 10% rate of return (pre-tax). This creates some uncertainty around the actual applicable IRR for AJTE 2’s revenues (in 2020)as well as the long-term cash flows of AJTE 1 and CHATE. However, we also factor into our analysis that the IRR-range is defined on apost-tax basis. We further consider that AJTE 1’s and CHATE’s cash flows during the fixed revenue period are modeled based on a returnof 11% (pre-tax) while a 8% (post-tax) was assumed for the resettable cash flows. These IRRs compare well with the 7-10% rangeunder the new law.

Our analysis also considers that the National Transmission Remuneration System will progressively transition, starting in 2019, to asystem based on an allocation of the transmission payment obligations across the unregulated generation and utility companies. In



contrast, Celeo’s projects currently receive the payments related to their transmission services (embedded in the power generationcosts) from the power producers. That said, we factor in the satisfactory credit profile of Celeo projects’ key IPP-counterparties. Theselargely consist of Enel Chile Generacion S.A. (Baa1 stable), Colbun S.A. (Baa2 stable), Empresa Eléctrica Pehuenche S.A. (unrated) andAES Gener S.A. (Baa3 negative). During 1Q 2018, they (and their subsidiaries) accounted for nearly 65% of Celeo’s revenues (2017:79%).

ADJUSTMENT MECHANISMS AND SATISFACTORY COUNTERPARTY RISKThe projects’ annual tariffs (VATT) consist of (i) the AVI, an Annuity calculated on the assets’ Investment Value (AVI) and the applicablerate or return, as well as (ii) the O&M and administrative operating costs (COMA). The AVI represents over 80% of the projects totalincome because the operational costs of transmission costs are typically limited.

The rates are adjusted monthly for AJTE 2 but only annually for AJTE 1 and CHATE. Nevertheless, we acknowledge that the underlyingrevenues indexation formulas and Celeo’s debt composition, US$-denominated notes around 60% and UF-denominated notes around40%, allow for a natural hedge. This considers that the projects’ COMA are fully indexed to changes in local inflation (with laboraccounting for the majority of their operational costs). In contrast, CHATE’s AVI is fully subject to changes in CLP/USD exchange ratewhich represents 44% of AJTE 1’s & AJTE 2’s AVI-indexation formulas (56% indexed to changes in the local inflation). Management’supdated financial model maintain assumptions for Chilean inflation to be 3.0% through 2019 and 3.5% 2020 onward, while it assumesUS inflation to step-up 0.2% to 2% in 2019 (2018: 1.8%) and then 2.25% 2020 onwards. These inflation rates are largely in line withMoody’s macroeconomic assumptions.

LIMITED CONSTRUCTION RISK EXPOSUREAt year-end 2017, AJTE 1’s and 2’s availability ratios remain very high (end of 2017: in excess of 98%). This is important because thelost revenues due to availability interruptions in the form of monthly discounts, a pass through to Celeo Redes Chile under the O&MAgreements, are capped to 50% of the monthly O&M fees. Any remaining discounts could be carried over to the following month butthe total aggregated discount amount is capped at 12.5% of the annual O&M fee, which relatively modest.

Our analysis also considers the experience of Elecnor and its subsidiaries to operate transmission assets, as well as reputationalconsiderations that may result should the transmission assets face material operational challenges, and penalties. The transmission law(TBL) foresees a new mechanism, also effective in 2020, to compensate end-users for failures in services (capped at 5% of the asset’srevenues). Importantly, the n-1 redundancy configuration of the Chilean system reduces the risk of outages due to unavailability events.Celeo’s credit profile also benefits from a 3-month O&M reserve of approximately $847 thousand.

Celeo’s credit quality reflects limited exposure to construction risk following the commission of CHATE in December 2017. Challengeswith the reforestation management plans and the release of the rights of way contributed to the delays in the project’s operationalstart date. However, the delay was credit neutral because the terms of the turnkey fixed-price EPC-Agreement insulated Celeo’sliquidity profile. Importantly, CHATE’s operations began around two months before the long stop date under the project Decree(February 25, 2018).

This view considers that the EPC-contractor’s total financial obligations, triggered by the delay, remained below the capped amountof $39.4 million, equivalent to 25% of CHATE’s EPC-contract price ($157.4 million excluding VAT), which Elecnor S.A. guaranteed. Wecalculate that the liquidated damages approximated $11 million which were levied in the form of a reduction of CHATE contract price.Completing the project before the long stop date also avoided exposure to penalties, a pass-through up to the capped amount.

We understand that CHATE was completed within budget including unforeseen costs of nearly $4.4 million (submitted in March2018). In April 2018, the Independent Engineer certified that this amendment of the EPC agreement did not represent any materialchange, also credit neutral. The EPC required these additional works to comply with local regulations, including the removal of residualmaterials along the transmission line produced during tree trimming process.

As mentioned earlier, Celeo is building the DATE project that remains outside the scope of the transaction. We understand that thisproject’s construction is progressing satisfactorily with its commission expected during 1Q 2019. Management anticipates that it willbe able to fund the vast majority of the remaining capital expenditure in the project with its available cash and short-term investments(March 2017: US$69.4 million; 2017: US$171.1 million) while it plans to use liquidity available at Celeo Redes Limitada to cover anyremaining gap (currently estimated not to exceed $10 million). Importantly, Celeo Redes S.L. (sponsor) is jointly and severally liable



with the Issuer to meet the obligations under this project. Pursuant to the back-to-back agreement, Celeo Redes S.L. will indemnify andreimburse Celeo within 15 days from the payment notification date all amounts that Celeo is required to pay under the terms of theDecree assuming the payments were made from available funds in Celeo’s USD Distribution Account or an Unrestricted Account (asdefined under the Notes). This limits Celeo's exposure to DATE's construction risk.

ASSETS HELD IN PERPETUITY AND AMORTIZING DEBT LIMIT CREDIT RISKS RELATED TO HIGH LEVERAGE AND LONG-TERM CASHFLOWS UNCERTAINTYCeleo’s credit quality is constrained by the projects’ high leverage. However, we acknowledge that the amortizing nature of the debtwill result in a gradual reduction of the project debt. The 30-year Notes are expected to fully amortize by the Notes maturity in 2047.

The amortization profile has been designed to target a minimum 1.25x for cash flows subject to fixed tariffs (that is, for AJTE 1 pre-2035and CHATE pre-2037) and 1.35x DSCRs for cash flow subject to resettable tariffs (that is AJTE 2 starting in 2020 and AJTE 1/CHATEpre-2037, respectively. At year-end 2017, Celeo recorded a DSCR of 1.28x, the same DSCR it expects to record at year-end 2018.

Exhibit 2

Debt service coverage remains stable until the debt fully amortizes at maturity in 2047

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

2.00x

2017 2022 2027 2032 2037 2042

End

ing

Deb

t B

ala

nce (

00

0s)

Deb

t S

erv

ice C

overa

ge R

atio (

x)

Ending Debt Balance DSCR

Source: Moody's Investors Service, Issuer Financial Model

We calculate that the scheduled debt amortization will allow Celeo to repay at least 31% and 37% of the Notes principal amounts(considering the inflation-indexed amounts due under the UF-Notes) after the expiration of the 20-year fixed tariff period for AJTE 1(2035) and for CHATE (2037). These assets will then also become subject to tariff reviews as it is the case for the AJTE 2 projects. InChile, the rate base used to calculate the tariffs is premised on the asset investment value (VI) which, unlike most global jurisdictions,does not reflect the assets’ depreciated value. This limits the visibility of AJTE1’s and CHATE’s transmission’s cash flows, in 17 and 20years, respectively, because the VI in Chile is based on the assets value of new replacement (VNR). This represents the investmentsrequired to build a complete new system. This is currently uncertain. For example, a significant change in technology that reduces thevalue of the transmission assets could also result in an adjustment downward of the assets VI. Thus, the credit risk increases during theNotes final ten years, particularly if the projects’ tariffs end up being materially lower than anticipated. This view also considers that thedebt amortization schedule is heavily back-ended, a credit negative.

However, in our analysis we consider that a break-even scenario in the financial model resulting in a 1.0x DSCR would need nearlya 24% reduction in the projected VI, which helps alleviate credit concerns given the long useful life of the assets which are heldin perpetuity. The credit quality also assumes that AJTE’s and CHATE’s 500 KV lines will remain, over the long term, key pieces ofinfrastructure of the Chilean transmission system in terms of demand and generation pockets (see map included in the Presale Reportpublished in May 2017).



Liquidity analysisCeleo's liquidity profile benefits from a 3-month O&M reserve account as well as 6-month debt service reserve accounts (DSRA)for the Notes denominated in USD and in Chilean UFs. We note that Celeo received the reimbursement of its VAT-payments ($6.8million) during the second half of 2017 and first half of 2018, that is earlier than initially anticipated at financial closing (2H 2018).Celeo is using these one-time payments to fund a higher debt service amount which explains apeak in the balances of its DSRAs. Theseaggregated to approximately $22.3 million at the end of June 2018 and is expected to drop to $17 million at year-end 2018. The Notesinclude a distribution test based on a 1.15 times DSCR, rising to 1.20 times after January 2036.

Rating methodology and scorecard factorsThe principal methodology used in these ratings was the Generic Project Finance Methodology published in April 2018. Please see theRatings Methodologies page on www.moodys.com for a copy of these methodologies.

The grid is a reference tool that can be used to approximate credit profiles in the industry in most cases. However, the grid is asummary that does not include every rating consideration. Please see the Generic Project Finance Methodology for information aboutthe limitations inherent to the grid. The assigned rating of Baa2 for Celeo Redes Operacion Chile S.A. is one notch below the gridindicated rating of Baa1 given the long-term uncertainty of the cash flows after the expiration of the 20-year fixed tariff period for AJTE1 (2035) and for CHATE (2037).

Exhibit 3

Generic Project Finance Methodology

Factor Subfactor Score Metric

1. Business Profile a) Market position A

b) Predictability of Net Cash Flows Baa

2. Operating Risk a) Technology Aa

b) Capital Reinvestment Aa

c) Operating Track Record Baa

d) Operator and Sponsor Experience, Quality and Support Baa

Project Risk Low

3. Leverage and Coverage a) Debt Service Coverage Ratio Ba 1.29x

Baa1

Notching Considerations Notch

1 - Liquidity 0

2 - Structural Features 0

3 - Refinancing Risk 0

4 - Construction and Ramp-up Risk 0

5 - Priority of Claim, Structural Subordination and Double Leverage 0

Baa1

Offtaker Constraint Applied? N/A

Level of Offtaker(s) Constraint Aa3

Scorecard Indicated Rating: Baa1

Preliminary Scorecard Indicated Outcome before Notching:

Preliminary Scorecard Indicated Outcome before Offtaker Constraint:

Financial performance based on management’s base case using the forecasted average through 2035, when the first contract rolls offSource: Moody's Investors Service



Ratings

Exhibit 4Category Moody's RatingCELEO REDES OPERACION CHILE S.A.

Outlook StableSenior Secured Baa2

Source: Moody's Investors Service



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Celeo Redes Operacion Chile S.A. · Celeo Redes Operacion Chile S.A. Update to Key Credit Factors Summary Celeo Redes Operacion S.A.’s (Celeo: Baa2 stable) credit quality reflects

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