In Chile’s clean-energy boom, the best performing dollar debt this year is a power generator that burns the dirtiest of all fuels.

Coal-fired plant operator Guacolda Energia SA has delivered investors a 70% return at a time when a surfeit of solar and wind projects leave the remaining thermoelectric generators as essential — and lucrative — backups in Chile’s bumpy transition toward carbon neutrality.

Pricing distortions and transmission problems are hurting a congested solar market in the sun-baked north, where Guacolda operates. Much lower coal costs give it a further bottom-line boost. The strains on a regulated power system conceived decades before the renewable boom have undermined a push to cease all coal-fired plants by 2025, further easing pressure on Guacolda. A new owner has lowered debt.

“With problems in the grid, and given its location, Guacolda became an important asset for covering power generation in time-slots when there is no solar energy,” said Martín Arancet, an analyst at Balanz Capital in Buenos Aires.

Returns on Guacolda’s notes due in 2025 have surged 70% this year, according to data compiled by Bloomberg, reaching 47 cents on the dollar after hitting a record-low 27 cents in November.

The bonds sold off after coal prices took off in the wake of the pandemic. But one measure of coal prices, which more than quadrupled in 2021 and 2022, is down 67% this year, easing costs. The firm’s net income more than doubled in the first quarter from a year earlier.

What’s more, if an agreement signed with Mitsubishi to look into ammonia co-firing yields favorable results, “it would open a new cycle for Guacolda,” said Manuel Mondia, an analyst at Aquila Asset Management AG.

Tender Offer

The selloff was also fueled by uncertainties surrounding a new approach by Capital Advisors, a local asset manager that acquired Guacolda in mid-2021. “But so far, owners have cut debt substantially and are gradually improving profitability, contributing to a renewed confidence,” Mondia said.

The company completed a tender offer in April, paying about $60 million in cash for $132.5 million of the notes.

“The buyback plan shows that the owners themselves are positive that Guacolda can keep taking advantage of this position in the coming years,” Balanz’s Arancet said. He sees room for further recovery.

To be sure, not everyone’s optimistic. Management has been unclear on refinancing and strategy, said Sandra Loyola, fixed-income analyst at Credicorp Capital in Santiago. “More transparency on these issues would be positive for the bond, but we don’t expect this to happen.”

Guacolda was raised to CCC+ from D at S&P after the tender offer. But the rating firm said it still faces a shortfall of cash to pay debt at maturity in April 2025 due to “unsustainable capital structure.”

Capital Advisors declined a request for comment.