NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a rating of 'BBB-' to AES Gener S.A.'s (AES Gener) proposed senior unsecured debt issuance of up to USD450 million with a 10-year bullet maturity. Proceeds from the 144A/RegS bond issuance will be used to refinance existing debt and will not result in additional significant indebtedness. Funds from the issuance will go towards refinancing USD308 million of existing Nueva Ventanas project finance debt with a maturity of 2022, unwinding related interest rate swaps, and tendering for existing local USD denominated bonds maturing in 2019 and totalling USD102.2 million. The notes will be rated the same as all of AES Gener's senior unsecured obligations, and will rank at least pari passu in priority of payment with all other AES Gener senior unsecured debt.
KEY RATING DRIVERS
AES Gener's ratings are supported by the company's solid liquidity given significant capex needs in the short to medium term. The ratings also reflect the company's balanced contractual position and a diverse portfolio of generation assets. The ratings also recognize that the company's major plants operate under constructive regulatory environments in Chile and Colombia. Credit risks include possible environmental and/or political issues, which could result in cost overruns or additional modifications in new and/or existing projects. The credit risks also include the regulatory uncertainties in Argentina related to Termoandes S.A., though these are mitigated given Argentina represented 5% of consolidated EBITDA during 2014. In addition, the company could face pressure from its controlling shareholder, AES Corp. ('BB-'/Outlook Negative), to increase dividends above those forecast by Fitch.
Strong End to 2014: In 2014, AES Gener reported consolidated adjusted EBITDA of USD667 million, which was 7% higher than 2013 results. After a weak first half of the year which saw lower availability of AES Gener's efficient coal plants due to a scheduled maintenance at the Ventanas coal complex, results picked up in the second half of the year as all the plants in the Ventana Complex were back in service. Furthermore, results were helped by a re-set of contracted prices in Chile at the end of the second quarter of 2014. Overall, 2014 EBITDA generation came in slightly above Fitch's forecasts and is poised to grow again in 2015.
In Midst of Expansion: The company has embarked on an aggressive expansion phase which brings with it significant execution risk (i.e., construction delays, accidents, cost-overruns, etc.). In addition, the expansion plan has resulted in additional pressure on the company's cash flow generation and credit metrics. Positively, the company has extensive history of finishing major projects on time and on budget. AES Gener's first phase of expansion took place between 2007-2013 in which the company successfully expanded its generation capacity by 48% to reach 5,081 MW of installed capacity at a total investment cost of USD3 billion.
The company is in the midst of what it has termed a second phase of expansion, which involves five major projects under construction that will increase installed capacity by 25%, with the total investment cost for the this expansion phase expected to cost USD4 billion. The Guacolda V Project will cost USD450 million (152 MW coal-fired with estimated operation date in 2H15) while Tunjita in Colombia (20 MW run of the river) will cost USD68 million (estimated operation date 1H16). AES Gener's non-conventional renewable energy project, the Solar Andes Project (21 MW) whose investment will total USD45 million, is expected to be operational in 2H15.
The largest projects to be executed are Cochrane (USD1.35 billion) and Alto Maipo (USD2.05 billion). AES Gener initiated construction in March of 2013 of its 532 MW Cochrane coal project in the SING (Sistema Interconectado del Norte Grande), with an estimated investment of approximately USD1.35 billion. In the Cochrane project, AES Gener has incorporated Mitsubishi Corporation as a shareholder with a 60%:40% equity stake, respectively. For Alto Maipo, a 531 MW run-of-the-river project, AES Gener incorporated Antofagasta Minerals S.A., a Chilean mining company, as a 40% shareholder. Non-recourse financing has been closed for both projects and the company used funds from junior subordinated notes (USD300 million) issued in 2013 and a USD150 million capital increase to fund the equity investments in both projects.
Negative FCF: Primarily due to cash outflows to fund the Cochrane and Alto Maipo projects, Fitch expects the company to generate negative free cash flow (FCF) in the 2015-2018 period, with peak capex forecast for 2014-2016 and a return to positive FCF generation in 2019. Fitch estimates that Cochrane will become a positive cash flow contributor in 2017 while Alto Maipo should do so in 2019. The company's financial strategy revolves around maintaining a balance between continuity of funding and financial flexibility through internally generated cash flows, bank loans, bonds, short-term investments, committed credit lines and uncommitted credit lines.
Pressured Credit Metrics: Given AES Gener is in the midst of an aggressive expansion plan, Fitch expects a weakening of the company's credit quality measures in the short to medium term. For the latest 12 months (LTM) ended March 31, 2015, the company's consolidated debt-to-EBITDA and EBITDA coverage metrics were 4.4x and 4.8x , respectively. These ratios are weaker versus leverage levels of 4.3x and 3.6x in 2013 and 2012 respectively, though coverage ratios of 4.8x improved versus 4.0x and 4.5x also in 2013 and 2012.
Excluding the non-recourse debt of the Alto Maipo and Cochrane power plants, AES Gener's debt-to-EBITDA for the LTM March 2015 period was 3.4x. Fitch expects the company's consolidated leverage levels to remain in the 4.5x-5x range during 2015, which is on the weak side for the rating category. Leverage levels should slowly decline to the 4x level starting in 2016 as Cochrane comes on-line and begins generating meaningful cash flows in 2016-2017.
High Dividend Payment: AES Gener has a track record of high dividend payments, and Fitch expects for the company to continue to payout 100% of net income going forward. Cash flow could be further pressured in the upcoming expansion phase should this dividend policy be increased to a payout rate above 100% of net income during peak capex periods.
A change in AES Gener's commercial policy that results in an imbalanced long-term contractual position would be viewed negatively by Fitch. In addition, a material and sustained deterioration of credit metrics reflected in total consolidated debt-to-EBITDA ratios above 4.5x-5x and total non-recourse debt-to-EBITDA ratios above 3x-3.5x on a sustained basis could result in a negative rating action.
Fitch believes that a positive rating action is limited at this time due to the expected capacity expansion over the next few years.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: Fitch believes AES Gener has adequate liquidity to support its financial needs during the peak capex period in 2014-2015, with the recent refinancing of its Angamos project finance debt a positive improvement to its short-term cash needs. The company's liquidity is supported by reported cash on hand of USD285 million as of March 31, 2015, which compares favorably with short-term maturities totalling USD199 million for all the 2015-2017 period. The company's liquidity is further buoyed by access to undrawn committed credit lines totalling USD236 million. Positively, the company's debt outstanding does not have major maturities coming due during the 2015-2019 period, which cushions the company for the aggressive build-out taking place.
--Peak capex for latest expansion program in 2014-2016;
--Cochrane becomes a positive contributor in 2016, with Alto Maipo following suit in 2019;
--100% of net income dividend payout rate;
--Peak leverage in the 4.5x-5.0x level during 2014-2015, with leverage declining to the 4x level starting in 2016.
Fitch currently rates AES Gener S.A. as follows:
--Foreign and local currency Issuer Default Ratings (IDRs) 'BBB-';
--International senior unsecured bond ratings 'BBB-';
--International junior subordinated bond ratings 'BB';
--Long-term national scale rating 'A+(cl)' ;
--National senior unsecured bond ratings 'A+(cl)';
--National Equity Rating 'Primera Clase Nivel 2(cl)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Aug. 25, 2014.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 28 May 2014)
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