Fitch Ratings has affirmed AES Panama Generation Holdings, S.R.L.’s (AES Panama Generation) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ and the Long-Term National Scale Rating of ‘AA+(pan)’. The Rating Outlook on all ratings is Stable. Fitch has also affirmed the company’s USD1.38 billion senior secured notes ratings at ‘BBB-‘ and ‘AA+(pan)’ on the international and national scales, respectively.

AES Panama Generation’s ratings reflect the consolidated credit profiles of its operating companies. Fitch expects AES Panama Generation to deleverage to 3.5x gross leverage by 2024 from 6.4x in 2020 due to scheduled debt amortizations, increased LNG storage fees and contracted price step-ups on its hydro power purchase agreements (PPAs).A parent and subsidiary relationship exists between AES Panama Generation and AES Corporation (BBB-/Stable) due to the latter’s pledge of shares in the operating companies but Fitch rates AES Panama Generation on a standalone basis, not assuming implicit support from the parent company.

 

KEY RATING DRIVERS

Medium-Term Leverage to Moderate: The companies’ 2020 combined leverage was 6.4x, which Fitch expects to moderate to 5.4x in 2021 and 4.5x in 2022 due to new wind and solar assets coming online and a 5.5% step-up in contracted energy prices with distribution companies in the latter year. Further deleveraging is anticipated in 2024 to 3.5x due to increased storage fees at the Costa Norte LNG Terminal. AESP will reduce debt by roughly USD270 million over the next three years due to scheduled amortizations of loans and bonds. FFO interest coverage will rise to 5.5x in 2023 from 4.2x in 2020 on stronger cash flow and lower interest due to debt reduction.

Diversification Mitigates Hydrology Risk: The addition of AES Colon, a 381MW LNG plant, has proven to mitigate hydrology risk, such as in 2019, a dry year, when it generated 2,700 GWh, or roughly 27% of supply. AES Panama has also expanded into renewables a 55MW wind acquisition in May 2020 and 20MW of solar constructed in 2021 and with an additional 20MW planned in 2022. The 105MW of wind and solar capacity will provide a cost-effective hedge against lower hydrology as these assets perform better during the dry season from December to April and during dry years. The company is exploring options to sell its 72MW fuel oil barge, which was taken out of commercial operation in August 2020.

Bayano Sale Negotiations Ongoing: In June 2021, Panamanian President Laurentino Cortizo revived discussions about the government’s intention to purchase Bayano, a 260MW hydro reservoir, from AES Panama for its water supply. Fitch estimates Bayano produces one quarter of AES’ hydro power in Panama and that a debt and contract rebalance would be necessary in the event of a sale. Cortizo also announced the construction of a 670MW LNG plant, Generadora Gatun, with a commercial operation date of 1Q24. AES Panama is expected to own 49% of the new venture with Interenergy Group owning 51%. Given AES’ minority stake, Fitch does not expect Gatun’s financials will be consolidated into AES Panama’s.

Strong Market Position: Fitch estimates AES Panama Generation Holdings’ companies accounted for 36% of the country generation in 2020 and 40% in 1H21, giving it a dominant position in the market. With the exception of a 72MW fuel oil barge, the company’s generation portfolio is highly cost competitive in the Panamanian market with 705MW of hydroelectricity. Among the company’s assets is AES Colon, a 381MW LNG plant, which debuted in August 2018 and is the country’s first gas-fired plant. LNG is a strategic initiative for Panama’s government and having built the first LNG tank, AES is positioned to sell storage to other currently-planned LNG plants, such as the recently announced 670MW Gatun plant.

Strong Cash Flow Generation: Fitch expects the company to generate strong cash flows over the life of the bond with EBITDA margins between 50% and 60%, net of AES Changuinola’s revenue received from AES Panama. This can be attributed to the profitability of the company’s hydro assets during periods of historically-normal hydrology conditions as well as capacity payments from distribution companies to AES Colon until mid-2028. Fitch estimates Colon’s capacity payments to be USD163 million, or slightly more than half of expected 2020 EBITDA. These payments along with distribution company PPAs through 2030 are well matched with the anticipated term of the company’s financing.

Moderate Off-taker Risk: AES Panama Generation Holdings faces moderate counterparty risk by virtue of its approximately 90% contracted position. Fitch estimates that approximately 28% of the combined companies’ capacity is contracted with Elektra Noreste S.A. (BBB/Stable), 62% with EDEMET and EDECHI, which are both majority owned and operated by Naturgy Energy Group S.A. (BBB/Stable), while the remaining 10% is contracted directly with large commercial users. Large commercial users are a growing portion of the companies’ client portfolio and diversify counterparty risk as they include a total of 43 companies.

Regulatory Risk: The company’s ratings also reflect its exposure to regulatory risk. Historically, generation companies in Panama were competitive, unregulated businesses free to implement their own commercial strategies. In the past several years, however, higher electricity prices have resulted in increased government intervention to curb the effect for end users. Efforts to diversify the country’s energy matrix will help to reduce prices over the medium term, limiting the need for regulatory interference.

DERIVATION SUMMARY

Fitch expects AES Panama Generation’s leverage to be between 5.4x and 4.0x between 2021 and 2023 before falling to below 3.5x in 2024 and thereafter. This capital structure is in line with that of Kallpa Generacion S.A. (BBB-/Negative), which is expected to have leverage of 3.9x to 4.6x over the medium term. Like AES Panama Generation, Kallpa also features a diversified asset base of both natural gas and hydro production. AES Panama Generation Holdings’ capital structure is also comparable with that of AES Andes S.A. (BBB-/Stable), which had 2020 leverage of 3.5x, which Fitch expects the company will maintain over the medium term.

AES Panama Generation’s capital structure is more aggressive than those of higher rated Colombian peers, such as Isagen S.A. E.S.P. (BBB-/Stable) and Emgesa S.A. E.S.P. (BBB/Negative), which are expected to have medium-term leverage of 3.0x and 1.0x, respectively. Both companies have significant hydroelectric capacity and mitigate El Nino risk with back-up thermal capacity. Despite comparable market shares, Isagen and Emgesa each have installed capacity in excess of 3,000MW, while AES Panama Generation’s is 1,232MW. The company compares favorably with Orazul Energy Peru S.A. (BB/Stable) with expected 2021 leverage of 4.3x.

The company’s National Scale Rating of ‘AA+(pan)’/Outlook Stable is comparable with that of Empresa de Transmision Electrica S.A. (ETESA; AAA[pan]/Stable). ETESA has higher projected medium-term leverage, with expected 2023 gross leverage of 6.0x, but it operates in the electricity transmission subsector, which is highly regulated and considerably less volatile than electricity generation. AESP’s sister company, AES Changuinola (AA-[pan]), had 2020 leverage of 5.5x with deleveraging expected to 2.6x in 2024.

 

KEY ASSUMPTIONS

– Hydrology conditions and plant load factors will follow their long-term historical averages in 2021 and beyond;

– The company adds 20MW of new solar assets 1Q22;

– Spot prices will be approximately USD65/MWh in 2021 and 2022 due to improved electricity demand, USD60/MWh in 2023 and USD45/MWh thereafter as new system capacity is added;

– Generadora Gatun, a 670MW LNG-fired plant, enters operation in 1Q24 and contracts LNG storage with Costa Norte;

– The 72MW Estrella del Mar barge does not generate;

– AES Colon sells its transmission line in 2021;

– No significant asset sales take place during the rating horizon without corresponding debt rebalancing;

– Expiring large user hydro PPAs are renewed with similar terms;

– Combined cash in excess of USD75 million will be paid out as dividends.

 

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–Sustained gross leverage below 3.0x over the medium term;

–A conservative contracting strategy that promotes cash flow stability and the ability to withstand hydrological shocks to the system;

–Continued evidence of sustainable spot price stabilization as a result of asset diversification in Panamanian electricity matrix.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–Sustained gross leverage above 4.0x and net leverage above 3.5x over the medium term;

–Increased government intervention in the sector, coupled with a weakening regulatory framework;

–Deterioration in the company’s ability to mitigate spot-market risk;

–Payment of dividends coupled with high leverage levels;

–Significant asset sales causing an adverse change in financial structure.

 

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 ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

 

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Fitch expects the combined company to generate strong cash flow from operations (CFFO) of USD170 million to USD250 million between 2021 and 2024, which will be sufficient to cover scheduled debt amortizations of USD115 million, USD55 million and USD100 million in 2021, 2022 and 2023, respectively. The remainder and majority of the companies’ debt is long term with nearly USD1.2 billion due in 2030. The companies’ strong operating cash flow and favorable debt maturity profile are partially offset by expected future dividends. Fitch assumes a combined minimum cash balance of USD75 million with any residual amounts expected to be paid as dividends. As of March 31, 2021, the combined companies held USD89 million in readily-available cash and equivalents.

 

ISSUER PROFILE

AES Panama Generation Holdings, S.R.L. (AESP) is a special purpose vehicle indirectly owned by the AES Corporation to finance certain of its operations in Panama. AESP is the issuer of USD1.38 billion in 4.375% amortizing notes due 2030.

 

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