Fitch Ratings has affirmed AES Panama, S.R.L.’s Long-Term, Local and Foreign Currency Issuer Default Ratings (IDRs) at ‘BBB-‘. In addition, Fitch has affirmed AES Panama’s National scale rating at ‘AA+(pan)’ and the company’s USD375 million notes due 2022 at ‘BBB-‘. The Rating Outlooks for the IDRs are Stable.
The ratings reflect AES Panama’s strategic changes to its generation portfolio and its re-contracting strategy, underpinned by Panama’s evolving electricity matrix designed to mitigate spot price volatility. Fitch expects the company’s 2020 gross leverage to fall to 3.5x from 4.0x in 2019, as the latter year had particularly challenging hydrology conditions. Fitch expects the company’s leverage to decline to 3.2x in 2021 as hydrology normalizes, new wind and solar assets generate a full year of revenue, and the company pays off debt incurred on the projects.
KEY RATING DRIVERS
Moderate Leverage Ahead: Fitch expects AES Panama’s 2020 leverage to be 3.5x due to the expiration of its barge power purchase agreement (PPA) in June, slightly lower than normal hydrology and new debt to fund renewables projects. Fitch believes the company’s 2021 leverage will fall to 3.2x as new wind and solar assets begin generating revenue and spot prices rise due to normalized conditions. Fitch expects medium-term leverage to be 2.6x and 2.5x in 2022 and 2023, as the company absorbs the cost of new investments and pays off some of the related debt. The company’s medium-term FFO interest coverage is expected to be above 5.0x. The company’s cash flow is strong but subject to volatility.
Increased Focus on Renewables: Fitch believes the company’s increased focus on renewables will supplement some cash flow from the expiration of its barge PPA and continue to provide a hedge against hydrology risk, as hydro comprises the majority of its asset portfolio. In May 2020, the company announced the acquisition of a 55MW wind farm. The PPA is expected to add USD12 million per year in revenue through 2023. In addition, the company is constructing 52MW of solar assets, which will begin operations in early 2021. Fitch expects the solar assets will add approximately USD8.5 million of revenue per year. Fitch views these steps to mitigate hydrology risk with low-cost renewable assets positively despite the initial expense.
Hydrology Beginning to Recover: Panama witnessed extremely dry conditions in 2019, which led to challenged hydrology for the company. Fitch estimates the company’s hydro production in April 2020 was approximately 100GWh, representing a 60% increase over April 2019. Spot prices have fallen due to improving hydrology and lower electricity demand, due to the coronavirus pandemic. As a result, spot prices have fallen to 44.75 Balboas/MWh in April 2020, compared to 111.57 Balboas/MWh in April 2019. The effect of lower spot prices on AES Panama is relatively neutral in the near term since the company is highly contracted. Fitch expects the company’s spot position to be fairly balanced in 2020 and 2021.
Strong Market Position: AES Panama and AES Changuinola represent 21.5% of the country’s installed capacity including the wind farm acquired in May 2020. AES Panama benefits from a competitive portfolio of low-cost hydroelectric generating assets, including dam-based reservoirs and run of the river units. The diverse location of the company’s assets somewhat mitigates its exposure to hydrology risk as the plants are located in different hydrology regions. AES Panama also benefits from having a large portion of its capacity, 350MW, contracted through 2030 with high-quality off-takers. The company is also diversifying its counterparty exposure by entering into PPAs with large users, which total approximately 33MW and last through 2026.
Exposure to 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, the increase in electricity prices has resulted in increased government intervention in the sector in order to curb the impact of high energy prices for end users. Efforts to diversify the country’s energy matrix will help to lower prices over the medium, reducing the need for regulatory interference.
DERIVATION SUMMARY
AES Panama’s most appropriate peers are Isagen S.A. ESP (BBB/Stable) and Emgesa (BBB/Stable), Colombian generators with significant hydroelectric capacity. Consistent with their investment grade ratings, all three companies mitigate El Nino risk with back-up thermal capacity. They also benefit from a regulatory environment that has evolved in the last several years to reduce potential price volatility from stressed hydrological conditions. With 554MW of installed capacity and a long-term physical contract for 223MW with its sister company, AES Changuinola (A+(pan)/Stable), AES Panama functionally represents 21.5% of the Panama’s installed capacity. This is in line with its peers, which have between 20%-25% of their respective markets. However, in terms of gross capacity, Isagen and Emgesa each have installed capacity in excess of 3,000MW.
AES Panama’s 2019 leverage of 4.0x was higher than that of Isagen, which posted gross leverage of 2.9x in 2019. Emgesa’s gross leverage fell to 1.3x in 2019 and is expected to remain below 2.0x through the medium term. AES Panama’s 2019 FFO interest coverage fell to 3.8x, lower than Emgesa’s of 5.7x, while higher than Isagen’s, which was notably lower at 1.8x.
AES Panama’s ‘AA+(pan)’ National scale rating is higher than that of peer AES Changuinola, rated ‘A+(pan)’. AES Panama’s expected 2020 leverage of 3.5x is lower than Changuinola’s expected 4.0x. AES Panama’s National scale rating is lower than that of Empresa de Transmision Electrica (ETESA), rated ‘AAA(pan)’, due to its strong linkage with the Panamanian government.
KEY ASSUMPTIONS
–Prices of USD50/MWh are anticipated in 2020 due to lower electricity demand. New capacity and normalizing hydrology will keep spot prices low at USD60/MWh from 2021 and onward.
–Hydrology follows average plant load factors for the previous 40 years from 2021 and onward. Hydrology in 2020 is 5% lower than the long-term average due to somewhat dry conditions at the beginning of the year.
–Barge fuel costs track Fitch WTI forecast in 2020;
–Barge generates approximately 60 GWh per year as a system back-up after its PPA expires in mid-2020;
–Large user PPAs are not renewed as they expire;
–Excess cash above USD20 million paid out as dividends;
–Bond due in 2022 is refinanced.
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