Fitch Ratings has assigned a 'BBB-(EXP)' rating to AES Andes S.A.'s proposed notes due 2029 for up to USD500 million.
The notes rank pari passu with AES Andes' existing senior unsecured notes. Net proceeds will fund the expected tender offer for up to USD100 million on the 6.35% 2079 hybrids notes, the 2025 notes and the remaining portion to repay existing bank debt. Fitch currently rates AES Andes' Long-Term Foreign Currency Issuer Default Rating (IDR) 'BBB-' and long-term National Scale rating 'A+(cl)'. The Rating Outlook is Stable.
Key Rating Drivers
Low Business Risk: AES Andes' ratings reflect its low business risk resulting from a balanced contractual position. Most of these contracts included fixed charges and passthrough clauses of variable costs, combined with additional renewable PPA's indexed to U.S. consumer price index. AES Andes has contractual position with strong counterparties with an average remaining life of 13 years in Chile and 12 in Colombia. The ratings also reflect the company's diverse portfolio of generation assets that support cash flow generation stability and predictability. In addition, the ratings reflect the company's major plants operating under constructive regulatory environments in Chile and Colombia.
Strong Contracted Position: AES Andes maintains more than 65% of its capacity contracted in the long term with investment-grade counterparties, and has benefited from those regulated clients migrating to the unregulated market due to regulation changes. AES Andes has continued to implement its coal to green strategy, transitioning to renewable supply with PPAs that totaled 3.0TWh per year, the most relevant being 1.6TWh annually for 15 years with Codelco (BBB+/Stable) and 1.1TWh/year for 17 years with Teck Resources Ltd. (BBB-/Stable).
Leverage in Line with Expectations: Fitch estimates AES Andes' gross EBITDA leverage will remain between 3.5x and 4.0x over the rating horizon, peaking at 4.2x by the end of 2023 and EBITDA-to-interest paid will remain above 3.5x. Fitch's base case assigns USD258 million equity credit to AES Andes' outstanding hybrid notes. Per Fitch's 'Corporate Hybrids Treatment and Notching Criteria,' there is no explicit limit on equity credit granted, but equity credit is not fully given when hybrids comprise more than 25% of a company's capital structure.
Decarbonization Strategy on Track: AES Andes has committed to make Ventanas 3 and 4, Angamos 1 and 2 available for retirement during January 2025, depending on the reliability of the system. Norgener units 1 and 2 received approval for decommission by March 2024; the units total approximately 1,371MW of coal installed capacity. After selling 50% plus one share in Guacolda, followed by the phase out of Ventanas 1 and Ventanas 2 (208 MW) during December 2023, AES Andes has removed 877MW of coal capacity from its balance sheet. Reaching this significant milestone by 2025 is subject to the analysis of potential retirement, sale or conversion to zero emissions technologies for these units, and if the Chilean electric system requirements make disconnection unfeasible given the transmission limitations.
Expansion Plans Through Partnerships: AES Andes' growth strategy is through partnerships, such as the one reached with Global Infrastructure Partners (GIP). The company sold a 49% stake in its special purposes vehicles, where renewable projects are built and operate. Fitch expects AES Andes will receive approximately USD600 million with this operation between 2023-2024 and will add 1,280MW of renewable installed capacity. The company's strategy is to keep the contracted PPAs at AES Andes, while providing energy through renewable vehicles under AES Andes' operation.
Ratings Equalized with Parent: Fitch rates AES Andes on a stand-alone basis, though its ratings are in line with those of its majority owner, The AES Corporation (BBB-/Stable). Fitch believes, per its 'Parent-Subsidiary Linkage Criteria,' that there is a strong operational and strategic relationship between AES Andes and AES Corp., given that AES Andes represents a material portion of AES Corp.'s incoming dividends. With the deconsolidation of Alto Maipo and the USD200 million impairments from disconnecting Norgener coal units by 2025, AES Andes' contribution to its parent will come from capital reductions between USD250 million and USD300 million, through 2024-2027.
Derivation Summary
AES Andes' ratings are below those of Enel Generacion Chile S.A. (BBB+/Stable), Engie Energia Chile S.A. (BBB/Stable) and Colbun (BBB+/Stable) as a result of the company's relatively weaker financial profile, though they carry similar business risks. AES Andes' consolidated gross leverage improved after deconsolidating Alto Maipo to below 2.0x from an average of 3.5x. Enel Generacion consistently reports gross leverage of around 2.0x and Colbun has leverage between 2.5x and 3.0x.
Similar to those Chilean electricity generation companies, AES Andes' credit profile benefits from a diverse generation portfolio, which features a component of long-term contracted assets with investment-grade counterparties and supports these companies' ratings. AES Andes' PPAs have an average life of 13 years in Chile and 12 in Colombia. The PPAs also allow for the pass-through of variable costs to the company's counterparties. AES Andes is slightly more exposed to re-contracting risk than peers Enel Generacion Chile and Engie Energia Chile, and is in a similar position as Colbun.
AES Andes is well positioned relative to its Latin American generation peers in installed capacity, asset diversification and contracted position. AES Andes has an installed capacity of approximately 5.2GW, which compares favorably with Colbun's 3.3GW and is similar to Enel Generacion Chile's 6.0GW.
Unlike Enel Generacion Chile and Engie Energia Chile, AES Andes benefits from geographical diversification, with operating assets in Chile, Colombia and, to a lesser extent, Argentina. This geographic diversification bodes well for the company's credit quality compared with Enel Generacion Chile and Engie Energia Chile, which are concentrated in a single country. In addition, AES Andes has limited exposure to hydrological conditions in Chile or Argentina, as its major hydro assets are in Colombia.
Key Assumptions
Contracted volume in Chile around 10,000GWh during 2024-2027;
Average energy sales in Colombia of 6,500GWh during 2024-2027;
Thermal coal (Australia Newcastle) at USD100 per ton during 2024, USD90 per ton in 2025, and USD80 per ton during 2026;
disconnect of Ventanas 3 and 4 and Angamos during January 2025 and Norgener 1 and 2 during March 2024;
Total capex of USD1.0 billion in 2024-2026, including maintenance;
Additional renewable capacity, including wind, solar and batteries of 425MW in 2024 and 80MW during 2025;
Annual capital reductions between USD300 million and USD250 million throughout 2024-2027;
Equity credit assigned to hybrids notes, totaling USD258 million;
Expansion projects to be financed with cash flow, new contracts and partnerships.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage consistently below 3.0x on a sustained basis, combined with EBITDA interest coverage above 4.5x;
Cash flow from new contracted capacity that integrates renewable projects supports results;
Improvement in the mix of cash flow generation toward higher-credit-quality markets;
Structurally neutral to positive FCF across the investment cycle;
Upgrade on AES Andes could result on upgrade on the company's outstanding hybrids notes.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage consistently above 4.5x, combined with EBITDA interest coverage below 3.5x;
Acceleration of decarbonization law in Chile affecting AES Andes cashflow profile, liquidity and leverage;
Higher probability of loss absorption or actual loss absorption on hybrids losing the current 50% equity credit;
A downgrade of AES Andes could result in downgrade of the company's outstanding hybrids notes;
A change in the company's commercial policy, leading to an unbalanced contractual position in the long term;
Pressure from shareholders to increase dividends and reduce debt repayments;
Increased exposure to non-investment-grade countries.
Liquidity and Debt Structure
Adequate Liquidity: As of December 2023, the company had cash on hand of USD228 million, and short-term debt maturities of USD482 million, mainly concentrated in bank debt. AES Andes' liquidity is supported by good access to refinancing and a comfortable debt maturity schedule. Liquidity is further buoyed by a USD255 million undrawn committed revolving credit facility.
Issuer Profile
AES Andes is the second largest electricity generation company in Chile, with 3.4GW of installed capacity. In addition, AES Andes operates 1.1GW in Colombia and 0.6GW in Argentina. The AES Corporation owns more than 99% of AES Andes.
Date of Relevant Committee
02 June 2023
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
AES Andes S.A. has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to its high 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.
AES Andes has an ESG Relevance Score of '4' for Management Strategy due to the company's aggressive expansion strategy and its history of abandoning assets, after they are deemed not strategic, core, or insolvent to the holding company. Prior to Alto Maipo's Chapter 11 filing, in 2021 the company sold its majority stake in Guacolda Energia, a coal power plant in Chile, and its divesture of material economic interest in Cochrane, both of which were viewed as efficient power plants with substantial debt loads, that was structured as non-recourse to AES Andes. This has no impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
AES ANDES S.A. 
