Fitch Ratings has affirmed AES Panama's Foreign Currency and Local Currency Issuer Default Ratings at 'BBB-'. The rating action applies to approximately USD300 million of notes outstanding due in 2016. The Rating Outlook is Stable.
AES Panama's ratings are based on the company's strong portfolio of assets with a competitive dispatch position, its solid multiple power purchase agreements (PPAs), as well as its adequate financial profile and no foreign-exchange risk. The ratings also reflect the company's exposure to hydrology risk, temporary commercial pressure created by Esti's plant outage, regulatory intervention and potential for long-term competitive price pressures.
Predictable Cash Flow Supported by Solid Contractual Position
AES Panama's ratings reflect the company's solid contractual position with low counterparty risk and minimum exposure to spot market volatility risks. Generation companies in Panama are permitted to enter into PPAs for up to their firm capacity allocation. The regulations promote the use of PPAs by requiring distribution companies to secure 100% of their peak regulated demand for the following year. AES Panama benefits from well-structured PPAs for approximately 89%, on average, of available capacity through 2018. 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 (rated with a Fitch IDR of '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 AES Panama.
AES Panama benefits from a competitive portfolio of low-cost hydroelectric generating assets, including dam-based (reservoir) 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 is the largest generation company in the country based on installed capacity. The company is comprised of four hydroelectric plants throughout the country with a total installed capacity of approximately 482 megawatts (MW) and different dispatch priorities. The Bayano plant (260MW) operates during the peak load hours yet ahead of the more expensive thermal units. La Estrella (48MW) and Los Valles (54MW) are run of the river facilities and the first units to be dispatched in the system. Esti (120MW), currently out of service, is normally dispatched similar to run of the river facilities given the limited size of its reservoir.
Esti Plant Outage
AES Panama's credit profile is expected to withstand throughout the repairs of the Esti plant, which is expected to regain commercial operations during the first half of 2012. Toward the end of 2010, AES Panama's Esti plant suffered a major business interruption as a result of a collapse in its conveyance tunnel. This was considered an unforeseen and inevitable event covered under the company's insurance policy. The company expects to receive proceeds from insurance claims to cover tunnel repairs and business interruption over the next 12 to 18 months. Liquidity, however, is strong enough to mitigate risks related to this event.
Adequate Credit Metrics and No Foreign Exchange Risk
AES Panama's credit metrics are adequate for the rating category, characterized by moderate leverage and interest coverage. The company reported financial leverage, as measured by total debt to EBITDA of 2.6 times (x) as of year end 2010. Interest coverage for 2010 was healthy at 5.8x. During 2010, the company managed to maintain relatively stable EBITDA and cash flow generation levels. As of year end 2010, AES Panama reported revenues of USD193 million and EBITDA of USD113 million. Total debt remained stable at USD300 million. Going forward, AES Panama's cash flow generation is expected to be relatively stable, or marginally lower than 2010. Its EBITDA margins are expected to deteriorate as the company buys electricity from AES Changuinola and sells it to distribution companies under long-term PPAs.
The company's liquidity position is supported by its strong cash flow generation and manageable amortization schedule, as no debt is due before 2016. Cash on hand as of Dec. 31, 2010 was healthy at approximately USD62 million. Annual interest expense of approximately USD20 million is satisfactorily covered with internal cash flow generation and cash on hand. AES Panama is expected to continue paying high dividends going forward as cash flow generation is expected to be strong and capital investment manageable. The ratings of AES Panama are not constrained by the sovereign rating of Panama, as access to foreign exchange is not limited by finite foreign-exchange reserves or controls. Panama's track record of using the U.S. dollar and allowing private-sector debt repayment during periods of sovereign default allows entities in Panama to be rated above the 'BBB-' sovereign rating and up to a country ceiling of 'A-', based on the underlying corporate credit rating of the entity.
Exposure to Regulatory Risk
The company's ratings also reflect its exposure to regulatory risk. Although the Panamanian government retracted its intention to implement steep water taxes for hydroelectric generation companies, it weakened the perception of regulatory independence from central government. Historically, generation companies in Panama were competitive unregulated businesses free to implement their own commercial strategies. Nowadays, generation companies are required to participate in power bidding auctions and to maintain a minimum contractual level. Furthermore, new power purchase agreements are now centrally coordinated by the government owned transmission company (ETESA), which could have marginally negative implications for the generation companies' negotiating power. This requirement is considered to be neutral for AES Panama given the company's well-contracted position, which for 2010 was approximately 99% of firm capacity.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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