Fitch Ratings has affirmed AES Andes S.A.'s (AES Andes) Long-Term Foreign and Local Currency Issuer Default Ratings at 'BBB-', National Scale Rating at 'A+(cl)', senior unsecured bonds rating at 'BBB-', junior subordinated (hybrid) notes at 'BB', and affirmed the company's national Equity Rating at 'Primera Clase Nivel 4(cl)'.
Rating Outlook is Stable.
AES Andes' ratings reflect its capacity to generate strong cash flow derived from its balanced contractual position in Chile and Colombia, coupled with high revenue visibility with an average life of eleven years of its private purchase agreement (PPA) in Chile, adequate liquidity profile, and expected EBITDA leverage between 3.5x and 4.0x during 2023-2026.
Key Rating Drivers
Low Business Risk: AES Andes' ratings reflect its low business risk resulting from a balanced contractual position with most of these contracts including fixed charges and passthrough clauses of variable costs with strong counterparties and an average remaining life of eleven years in Chile and ten years in Colombia, combined with a diverse portfolio of generation assets that support cash flow generation stability and predictability. The ratings also reflect the company's major plants operating under constructive regulatory environments in Chile and Colombia.
Strong Contracted Position: AES Andes maintains more than 65% of its capacity contracted in the long term with investment-grade counterparties, and has benefited from those regulated clients migrating to the unregulated market due to the change in regulation. AES Andes has continued to implement its coal to green strategy with PPAs that totaled 3.0TWh per year, the most relevant being 1.6TWh annually for 15 years with Codelco (A-/Stable) and 1.1TWh/year for 17 years with Teck Resources Ltd. (BBB-/Stable).
Leverage in Line with Expectations: Fitch estimates AES Andes' gross EBITDA leverage will remain between 3.5x and 4.0x over the rating horizon, peaking at 4.0x by the end of 2023 and EBITDA-to-interest paid will remain above 3.5x. For the LTM ended March 31, 2023, AES Andes' EBITDA Leverage reached 3.7x., in line with the 3.4x registered during 2022YE. Fitch's base case assigns USD258 million equity credit to AES Andes' USD844 million outstanding hybrid notes. Per Fitch's Corporate Hybrids Treatment and Notching Criteria, there is no explicit limit on equity credit granted, but equity credit is not fully given when hybrids comprise more than 25% of a company's capital structure.
Decarbonization Strategy on Track: AES Andes has committed to retire Ventanas 3 and 4, Angamos 1 and 2, and Norgener unit 1 and 2 by December 2025; the units total approximately 1,371MW of coal installed capacity. After selling 50% plus one share in Guacolda, followed by the phase out of Ventanas 1 , AES Andes has removed 877MW of coal capacity from its balance sheet. Reaching this significant milestone by 2025 is subject to the analysis of potential retirement, sale or conversion to zero emissions technologies for these units, and if the Chilean electric system requirements make disconnection unfeasible given the transmission limitations.
Expansion Plans Through Partnerships: AES Andes' growth strategy is through a partnership with Global Infrastructure Partners (GIP), by selling a 49% stake in special vehicles where renewable projects are built and operate. Fitch expects AES Andes will receive approximately USD600 million with this operation between 2023-2024 and will add 1,280MW of renewable installed capacity. The company's strategy is to keep the contracted PPAs at AES Andes, while providing energy through renewable vehicles under AES Andes' operation.
Ratings Equalized with Parent: Fitch rates AES Andes on a stand-alone basis, though its ratings are in line with those of its majority owner, The AES Corporation (BBB-/Stable). Fitch believes, per its Parent-Subsidiary Linkage criteria, that there is a strong operational and strategic relationship between AES Andes and AES Corp., given that AES Andes represents a material portion of AES Corp.'s incoming dividends. With the deconsolidation of Alto Maipo and the USD200 million impairments from disconnecting Norgener coal units by 2025, AES Andes' contribution to its parent will come from capital reductions between USD250 million and USD300 million, through 2023-2026.
Equity Rating: Fitch has affirmed AES Andes's rating equity rating at 'Primera Clase Nivel 4(cl)'. The company's free float remains below 1% after completing the tender offer from The AES Corporation. AES Andes' daily average trading volume of USD3,000 as of May 2023 is significantly lower compared with USD1.5 million as of June 2022. Fitch estimates AES Andes' free float and trading volume are consistent with the 'Primera Clase Nivel 4(cl)' rating category.
Derivation Summary
AES Andes' ratings are below those of Enel Generacion Chile S.A. (BBB+/Stable), Engie Energia Chile S.A. (BBB/Stable) and Colbun (BBB+/Stable) as a result of the company's relatively weaker financial profile, though they carry similar business risks. AES Andes' consolidated gross leverage improved after deconsolidating Alto Maipo to below 2.0x from an average of 3.5x. Enel Generacion consistently reports gross leverage of around 2.0x and Engie Chile and Colbun have leverage between 2.5x and 3.0x.
Similar to those Chilean electricity generation companies, AES Andes' credit profile benefits from a diverse generation portfolio, which features a component of long-term contracted assets with investment-grade counterparties and supports these companies' ratings. AES Andes' PPAs have an average life of eleven years in Chile and ten years in Colombia. The PPAs also allow for the pass-through of variable costs to the company's counterparties. AES Andes is slightly more exposed to recontracting risk than peers Enel Generacion Chile and Engie Energia Chile, and is in a similar position as Colbun.
AES Andes is well positioned relative to its Latin American generation peers in installed capacity, asset diversification and contracted position. AES Andes has an installed capacity of approximately 5.2GW, which compares favorably with Colbun's 3.3GW and is similar to Enel Generacion Chile's 6.0GW.
Unlike Enel Generacion Chile and Engie Energia Chile, AES Andes benefits from geographical diversification, with operating assets in Chile, Colombia and, to a lesser extent, Argentina. This geographic diversification bodes well for the company's credit quality compared with Enel Generacion Chile and Engie Energia Chile, which are concentrated in a single country. In addition, AES Andes has limited exposure to hydrological conditions in Chile or Argentina, as its major hydro assets are in Colombia.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Contracted volume in Chile of 11,300GWh, 10,400GWh and 9,700GWh during 2023, 2024 and 2025, respectively;
Average energy sales in Colombia of 6,500GWh during 2023-2026;
Thermal coal (Australia Newcastle) at USD190 per ton during 2023, USD90 per ton in 2024, and USD83 per ton during 2025;
The disconnect of Ventanas 3 and 4, Angamos and Norgener 1 and 2 during December 2025;
Total capex of USD1.3 billion in 2023-2025, including maintenance;
Additional renewable capacity, including wind, solar and batteries of 398MW in 2023, 464MW in 2024 and 524MW during 2025;
Monetization of approximately USD200 million from PEC2 during 2Q23;
Annual capital reductions between USD300 million and USD250 million throughout 2023-2026;
Equity credit assigned to hybrids notes, totaling USD258 million;
Expansion projects to be financed with cash flow, new contracts and partnerships.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage consistently below 3.0x on a sustained basis, combined with EBITDA interest coverage above 4.5x;
Cash flow from new contracted capacity that integrates renewable projects supports results;
Improvement in the mix of cash flow generation toward higher-credit-quality markets;
Structurally neutral to positive FCF across the investment cycle;
Upgrade on AES Andes could result on upgrade on the company's outstanding hybrids notes.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage consistently above 4.5x, combined with EBITDA interest coverage below 3.5x;
Acceleration of decarbonization law in Chile affecting AES Andes cashflow profile, liquidity and leverage;
Higher probability of loss absorption or actual loss absorption on hybrids losing the current 50% equity credit;
A downgrade of AES Andes could result in downgrade of the company's outstanding hybrids notes;
A change in the company's commercial policy, leading to an unbalanced contractual position in the long term;
Pressure from shareholders to increase dividends and reduce debt repayments;
Increased exposure to non-investment-grade countries.
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: As of March 2023, the company had cash on hand of USD189 million, and short-term debt maturities of USD375 million, mainly concentrated in bank debt. AES Andes' liquidity is supported by good access to refinancing and a comfortable debt maturity schedule. Liquidity is further buoyed by a USD200 million undrawn committed revolving credit facility.
Issuer Profile
AES Andes is the third largest electricity generation company in Chile, with 3.4GW of installed capacity. In addition, AES Andes operates 1.1GW in Colombia and 0.6GW in Argentina. The AES Corporation owns more than 99% of AES Andes.
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
AES Andes S.A. has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to its high reliability on coal for energy generation. Fitch estimates it has a negative impact on the company's credit profile, in conjunction with others factors, following the agreement between the Chilean Government and Generation Companies to completely phase-out coal generation by 2040.
AES Andes has an ESG Relevance Score of '4' for Management Strategy due to the company's aggressive expansion strategy and its history of abandoning assets, after they are deemed not strategic, core, or insolvent to the holding company. Prior to Alto Maipo's Chapter 11 filing, in 2021 the company sold its majority stake in Guacolda Energia, a coal power plant in Chile, and its divesture of material economic interest in Cochrane, both of which were viewed as efficient power plants with substantial debt loads, that was structured as non-recourse to AES Andes. This has no impact on the credit profile.
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.
AES ANDES S.A. 
