Fitch Ratings has affirmed AES Argentina Generacion S.A.'s (AAG) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at 'CCC-'.

AAG's ratings reflect the company's exposure to the Argentine sovereign (CC) due to the electricity sector's reliance on government subsidies and AAG's dependence on payments from FONINVEMEM funds, which are sovereign obligations. Fitch rates AAG on a standalone basis from its parent, AES Corporation (BBB-/Stable), due to a lack of legal guarantees from the parent and a low strategic and operational incentive to support AAG.

Key Rating Drivers

Heightened Counterparty Exposure Partially Offset by FONINVEMEM Receivables: AAG depends on payments from the company's main off-taker, the Wholesale Electricity Market Clearing Company, or Compania Administradora del Mercado Electrico Mayorista S.A. (CAMMESA), which acts as an agent on behalf of an association representing agents of electricity generators, transmission, distribution and large consumers or the wholesale market participants. CAMMESA's payment delays to the electricity sector averaged close to 80 days over the nine-month period through Sep. 30 in 2023, above the contractual 42 days.

Counterparty risk is somewhat mitigated by the company's more predictable receivables from FONINVEMEM investments with USD37 million received through 3Q23. Upon repayment of the outstanding roughly USD109 million owed to AAG as of 3Q23, the company will own an equity stake of up to 30% in Guillermo Brown, a 578MW single-cycle plant. Repayments of FONINVEMEM obligations are U.S. dollar-denominated and have been made on schedule. Roughly 65% of the system cost at YE 2022 was funded with government subsidies. In addition, AAG's other major revenue source is its newly constructed 200MW of wind farms, which generate revenue in excess of USD40 million per year and do not depend on commodity inputs.

Parent Linkage: The ratings are based on AAG's Standalone Credit Profile, as overall legal, operational and strategic incentives to its parent company to support AAG, if needed, are low. AAG is fully-owned by AES Corporation but there are no guarantees in place from the parent or cross-default clauses. Strategic incentives are low as AAG does not provide a significant financial contribution to AES Corporation. While both entities have the same core business, and there is some material common management, operational benefits to the parent are not material. Considering all three linkage factors are assessed as low, Fitch rates AAG on a standalone basis.

Hydro Concession Expirations and Limited Growth Expected: The expiration of concessions for key hydro assets will lower future EBITDA to below USD100 million in 2024. The concession for the 1,050MW Alicura hydro plant on the Limay River was set to expire on Aug. 10, 2023 but was extended until March 19, 2024. Going forward, Fitch anticipates lower revenues by USD17 million on a full-year basis. The expiration of concessions for the 102MW Cabra Corral and 45MW El Tunal assets on the Juramento River in November 2025 will have a less pronounced impact given their smaller size.

A wind expansion project has been postponed, and could be deferred further, given the new government has paused all projects not yet in development, so new debt financings are currently not in Fitch's forecast. AAG's gross leverage in Fitch's base case scenario is projected to decline to 2.9x in 2023, and to 0.7x by 2024 as the company has repaid its outstanding balance of notes due Feb. 2, 2024 with available cash (USD69 million) and a USD60 million loan with local banks.

Base Energy Inflation Adjustment: The indexation of Base Energy, or Energia Base, will be important for AAG and other producers, as revenue is nearly 80% derived from Energia Base when FONINVEMEM collections are considered. Base Energy was pesified, or denominated in Argentine pesos per Resolution 31/2020. Since then, approximately 10 additional resolutions have been passed to increase rates, with the latest (Resolution 9/2024) adjusting rates by 75% and maintaining the tolling agreement structure in place.

Uncertain Regulatory Environment: The electricity market remains uncertain under President Milei. Fitch estimates the government transferred USD5.9 billion in funds to CAMMESA in 2023. While the new government has pledged to reduce subsidies to the system, we expect the portion of the system that is subsidized will remain significant despite the new government's increased tariffs in the Buenos Aires region and goal in Argentina's IMF agreement for electricity subsidies to be 1.7% of GDP, down from 2.3%.

Low Commodity Price Effect: Exposure to rising global commodity prices will be low. Revenue is primarily from Energia Base, with participants having fuel sourced and paid for by CAMMESA. While the coal used in the San Nicolas plant is sourced internationally, from Colombia (BB+/Stable), Australia (AAA/Stable) and South Africa (B-/Stable), and is part of AAG's cost structure, its cost is entirely reimbursed by CAMMESA.

Derivation Summary

AAG's ratings reflect exposure to CAMMESA as an offtaker, which is reliant on subsidies from the Argentine government. This is the same situation for Argentine utility and energy peers Pampa Energia S.A. (B-/Stable), Capex S.A. (CCC+) and Genneia S.A. (CCC-). AAG is concentrated only in the electricity generation sector, presenting a balanced portfolio between thermal, wind and hydro assets.

Pampa has a more diversified business profile as a leading company in electricity generation, distribution, transmission, gas production and transportation, while Capex has an advantageous vertical integration in the thermoelectric generation segment, with the flexibility of having its own natural gas reserves to supply plants. Genneia is the leading wind power generation provider in the country with an aggressive expansion plan in renewables.

In terms of credit metrics, AAG's gross leverage as of YE 2022 was 4.1x, compared with Pampa at 1.4x, Genneia at 3.5x, Generacion Mediterranea S.A. (CCC-) at 7.2x, MSU Energy S.A. (CCC-) at 5.4x and Capex at 1.6x (YE 2023) as of Jan. 31, 2023. On a net basis, AAG's leverage was 3.2x in 2022, reflecting USD66 million of cash and equivalents. Fitch estimates AAG's projected gross leverage will average 1.0x in the medium term, below Argentine peers' median of 3.0x.

Key Assumptions

Energia Base assets are remunerated under Resolution 440/2021 with full inflation pass-through in each subsequent year;

Gross generation of approximately 5,900GWh during 2023, falling to roughly 4,650GWh in 2024 after the expiration of the Alicura hydro concession in March 2024;

AAG achieves generation capacity factors of 25% for thermal assets, 20% for hydro and 40% for wind during the rating horizon;

Average annual maintenance capex of USD13 million over the rating horizon;

No dividend payments until 2025;

U.S. dollar-denominated receivables related to FONINVEMEM of approximately USD50 million per year until 2026, all related to Guillermo Brown;

Refinancing of the majority of outstanding notes due 2027.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade to the ratings of Argentina could result in a positive rating action;

Given the issuer's high dependence on subsidies from CAMMESA, any regulatory developments leading to a more independent market less reliant on support from the Argentine government could positively affect collections and cash flow.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of AAG below 'CCC-' would be due to Fitch's belief that a default of some kind appears probable or a default or default-like process has begun, which will be represented by a 'CC' or 'C' given the ratings of AAG are linked to those of the Argentine sovereign due to the high reliance on government subsidies to the electricity sector.

Liquidity and Debt Structure

Adequate Liquidity: AAG reported available cash of ARS40.6 billion (USD116 million), as of Sept. 30, 2023, covering one year of interest expense, assuming no additional debt is raised. The company paid off its 300mil bond due in 2024 partially with proceeds from a tender and exchange offer issued in July 2023, and full repayment of the exchange holdouts at maturity (Feb. 2, 2024) with USD69 million of available cash and USD60 million of bank debt in local currency.

Issuer Profile

AES Argentina Generacion S.A. (AAG), which is 100% owned by the AES Corporation (BBB-/Stable), is an electricity generation company in Argentina with an installed capacity of 3,001MW.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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