AES CORPORATION (THE) 
Fitch Ratings has affirmed
Fitch has also affirmed Andres'
Andres' ratings reflect a strong linkage to the
A parent and subsidiary relationship exists between
Key Rating Drivers
Weakening Leverage Profile: Fitch expects AES Andres' credit profile to weaken in 2023 through 2025 due to a temporary reduction in the company's dispatch of electric generation and cancellation of its traditional purchased power agreements (PPAs) with the state-owned public distribution companies (discos). This reduction is because near-term, the company's new LNG supply contract with Total, benchmarked to the TTF index, will make electricity generation highly uneconomical for the discos, contrary to Andres' historic position as the country's most cost-effective generator.
While Fitch-calculated leverage (debt/EBITDA) should stay favorable yoy at 2.4x in fiscal 2022, Fitch expects leverage to steadily increase thereafter as revenues reduce and become dependent on unpredictable LNG and merchant sales. Leverage will approximate 4.1x by 2025, approaching Fitch's downward rating sensitivity of 4.5x. Fiscal 2022 EBITDA of
Expanding Natural Gas Business: Andres operates the country's sole LNG import terminal, offering regasification, storage, and transportation infrastructure. In 2023, in lieu of its traditional PPAs, AES Andres will increase third-party and extraordinary LNG sales, as well as remain contracted with non-regulated users (NRUs, which typically average 24% of revenues) and provide merchant spot and peaking generation to the grid. LNG sales comprised 44% of fiscal 2021 revenues and are estimated to grow to an average 55% in 2022 and 2023, including extraordinary one-time sales.
Extraordinary sales are being generated by gas purchases through the current supply contract with
Dependence on Government Transfers: High energy distribution losses have averaged a chronic 33% due to low collection rates and important subsidies for end-users. This has created a strong dependence on government transfers for the country's generation companies, and is been exacerbated by the country's exposure to fluctuations in fossil-fuel prices and strong energy demand growth from discos. The regular delays in government transfers have pressured generators' working capital needs and added volatility to their cash flows.
This situation increases sector risk, especially at a time of rising fiscal vulnerabilities affecting the Central Government's finances. Cash flow to Andres and DPP has historically been affected by delays in payment from the state-owned distribution companies, particularly during periods of high fuel oil prices, which have pressured the system financially. Payment delays should stabilize following regulatory changes.
Moderate Cash Flow Volatility: Cash flow to Andres and DPP has historically been affected by delays in payment from the state-owned distribution companies, particularly during periods of high fuel oil prices, which have pressured the system financially. As of
High-Quality Asset Base: Historically, Andres has ranked among the lowest-cost electricity generators in the country. Andres's combined-cycle plant with dual natural gas as well as fuel oil No. 6 (diesel), and is generally expected to be fully dispatched as a base-load unit as long as the LNG price is not more than 15% higher than the price of imported diesel.
Given the currently high costs of LNG, the company will utilize comparatively lower-cost diesel fuel for its near-term generation needs. The company continues to invest in renewable assets as well, adding 150 MW of solar and wind assets to the portfolio over the past several years at zero variable cost. Longer-term, the company will acquire a 24% ownership stake in one of two new 400 MW combined cycle gas turbine plants in the country. ENADOM will supply gas to both 400MW projects.
Derivation Summary
Andres's ratings are linked to and constrained by the
AES Andres has a thermal generation asset with competitive cost generation. In addition, AES Andres has an integrated operation with a natural gas port, regasification, storage and gas pipeline facilities, as well as an expanding renewables business. Meanwhile, EGE Haina benefits from a diversified energy matrix which includes thermal and nonconventional renewable energy assets. EGE Haina's leverage should increase to 4.6x by 2022 as a new subsidiary,
Andres's capital structure is strong relative to similarly rated, unconstrained peers. The
Key Assumptions
Both Andres and DPP reduce generation volumes in favor of lower-cost generators, cancelling disco PPAs during 2023 but continuing non-regulated user contracts. Most margin driven through spot market and LNG sales;
Andres and DPP increase generation through physical PPAs, with margins driven by capacity revenues;
By 2026 both generators resume financial PPAs with discos and margins revert to generation;
Additional
Monomic contract prices of
Electricity spot prices of
Santanasol I comes online in 2022, Santanasol II and Mirasol I in 2023, and Mirasol II in 2024 with each unit having a total capacity of 50MW;
Fuel prices track Fitch price deck;
Additional
Dividends average
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade in the
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade in the
Sustained deterioration in the reliability of government transfers;
Continued exposure to spot sales and gas sales that collectively represent more than 60% of EBITDA, coupled with a financial performance deterioration resulting in the combined Andres/DPP ratio of debt-to-EBITDA to above 4.5x for a sustained period.
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 '
Liquidity and Debt Structure
Well-spread Maturities: Andres and DPP have historically reported very strong combined credit metrics for the rating category. Both companies have financial profiles characterized by low to moderate leverage and strong liquidity. Combined EBITDA as of LTM
Issuer Profile
AES Andres is a 319 MW combined cycle power station and has a 160,000 m3 LNG storage facility, regasification terminal and a 34km pipeline to DPP. The company also operates 100 MW of solar and 50 MW of wind assets, with more in the pipeline. DPP is a combined cycle natural gas-fired plant with an installed capacity of 359 MW.
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
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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