Fitch Ratings rates AES Panama S.R.L.'s (AESP) proposed USD
notes reopening 'BB+'. The reopened notes are part of AESP's notes
due 2022 and will be used primarily to refinance the remaining
outstanding debt for the notes due at the end of 2016.
KEY RATING DRIVERS
Improving Credit Metrics:
AESP's credit metrics have significantly improved since 2014,
and Fitch expects this improvement to continue. In 2015, AESP had
EBITDA of USD99.7 million on revenues of USD299 million (versus
USD12 million and USD261.8 million, respectively in 2014). This was
primarily driven by improved hydrological conditions and by lower
spot prices, reflecting the global decline in oil prices.
Consequently, the company's margins recovered to 33% (versus 5% in
2014) while leverage improved to 3.8x and interest coverage
rebounded to 4.2x. Fitch expects to see tightening liquidity as the
company returns to its stated cash policy whereby excess funds over
USD20 million are paid out as dividends.
The hydrology forecast points to heavier rainfall in the second
half of 2016 as a result of the 'La Nina' effect. Base case
assumptions indicate normal hydrology for the next few years, while
spot prices continue being driven down by the low price of oil and
improved energy supply dynamics, as Panama adds new generation
projects to the matrix between now and 2020.
Moderate Exposure to Hydrological Risk:
AESP maintains power purchase agreements (PPAs) that represent
approximately 90% of its installed capacity. This elevated level
exposes AESP to changes in hydrological conditions and spot market
prices such as those observed during 2014 and 2013. In the medium
term, AESP is considering several alternatives for managing
hydrology risk. By adding the 72MW Estrella del Mar thermal barge
to its asset base, AESP will be able to offset some of its own spot
market costs with the barge's price-adjusted revenues.
Alternatively, after Estrella del Mar's contracts expire in 2020,
the company could use the barge's capacity to directly supply
back-up energy.
As part of the actions being taken by the company to reduce its
exposure to hydrology risk, AESP is also considering not renewing
the PPAs that expire over the next five years. Thereafter, it would
try to enter into short-term contracts to give the company a better
degree of climatological visibility. The company's contractual
strategy will consist of reducing or increasing its contracted
capacity based on hydrology and spot price expectations.
Diversification of the Panamanian Energy Matrix:
Panama has nearly 1300 MW of non-hydro based generation under
various stages of constructions between now and 2020, including a
380MW natural gas plant which will be operated by AES Corp through
a joint venture with Inversiones Bahia. The expansion of
alternative generation sources within the Panamanian power matrix
should help keep spot prices low, even in stressed hydrological
conditions.
Cash Flow Supported by Contractual Position:
AESP's ratings reflect company's contractual position with low
counterparty risk. Generation companies in Panama are permitted to
enter into PPAs for up to their firm capacity allocation. According
to the local regulator, firm capacity is calculated based on a
30-year historical average. The regulations promote the use of PPAs
by requiring distribution companies to secure 100% of their peak
regulated demand for the following year. AESP maintains PPAs for
approximately 91%, on average, of available capacity through 2018.
Thereafter, the company has secured contracts for 350 MW (between
70%-80% of capacity) through 2030.
The company sells electricity under separate PPAs with the
country's three distribution companies, Empresa de Distribucion
Electrica Metro-Oeste S.A. (Edemet), Elektra Noreste (IDR 'BBB'),
and Empresa de Distribucion Electrica Chiriqui (Edechi), with
various maturities. Panamanian distribution companies appear to
have the sufficient credit quality and financial ability to support
their respective obligations under the PPAs with AESP.
Strong Market Position:
AESP is the largest generation company in the country based on
installed capacity accounting for 18% market share (without
considering AES Changuinola installed capacity of 223MW). AESP
benefits from a competitive portfolio of low-cost hydroelectric
generating assets, including dam-based reservoirs and run of the
river units. The company is composed of four hydroelectric plants
throughout the country with a total installed capacity of
approximately 482 MW and different dispatch priorities. The thermal
plant, Estrella del Mar, has an installed capacity of 72MW. The
diverse locations of the company's assets somewhat mitigate its
exposure to hydrology risk as the plants are located in different
hydrology regions.
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 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.
KEY ASSUMPTIONS
--New capacity through next five years keeps spot prices
low;
--Expiring PPAs are not renewed in 2019 & 2020;
--No significant El Nino effects in the near to medium term;
--Excess cash above USD20 million paid out as dividends;
--Barge fuel costs gradually increasing over the next several
years.
RATING SENSITIVITIES
A downgrade could result from a combination of the following
factors: leverage above 4.0x on a sustained basis, increased
government intervention in the sector coupled with weakening
regulatory framework, inability to reduce exposure to the spot
market, and/or payment of dividends coupled with high leverage
levels.
Factors that could trigger a positive rating action include: a
sustained decrease in leverage below 3.0x coupled with an effective
diversification of revenues among different fuels, and reduced
exposure to spot market risk.
LIQUIDITY
AESP's policy is to maintain a cash balance of USD20 million,
dividends payments are subordinated to this policy. The company
maintains short-term credit facilities for up to USD105 million.
The company has no FX exposure, as it operates in Panama.
AESP's current debt consists of USD82 million of outstanding
senior unsecured notes due in December 2016, and its recently
issued USD300 million bond due 2022. The expected reopening of the
latter will be used to refinance the former.
FULL LIST OF RATING ACTIONS
Fitch currently rates AES Panama as follows:
AES Panama SRL
--Foreign Currency Long-Term Issuer Default Rating (IDR)
'BB+';
--Local Currency Long-Term IDR 'BB+';
--National Long-Term Rating 'AA-(pan)'.
--USD300 million notes due 2016 (USD82 million outstanding)
'BB+';
--USD300 million notes due 2022 'BB+' and 'AA-(pan)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: June 14, 2016
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Fitch RatingsPrimary AnalystJohn
WiskeAnalyst+1-212-908-9195Fitch Ratings, Inc.33 Whitehall St.New
York, NY 10004orSecondary AnalystLucas AristizabalSenior
Director+1-312-368-3260orCommittee ChairpersonDaniel R. Kastholm,
CFAManaging Director+1-312-368-2070orMedia RelationsElizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com