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

Fitch has also affirmed AAG's 'CCC'/'RR3' ratings for the company's USD300 million senior unsecured notes due 2024.

AAG's ratings reflect the company's exposure to the Argentine sovereign (CCC-) due to the electricity sector's reliance on government subsidies and AAG's dependence on payments from FONINVEMEM funds, which is a sovereign obligation. 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.

The 'CCC'/'RR3' ratings on the USD300 million senior unsecured notes are based on precedent in Argentina, where issuers launched direct debt exchanges (DDEs)that did not result in a reduction in principal, and the recoveries were above the implied recovery of an 'RR3' (51% to 70%), and the previous recovery rating of 'RR4' (31%-50%), corresponding to the Group D category within which Argentina lies.

Key Rating Drivers

Heightened Counterparty Exposure: AAG depends on payments from 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. Argentine generation companies receive payments from CAMMESA within 42 days after the close of the period, but payments have been delayed to an average of 65 days in recent months. Roughly 45% of the system cost as of 4Q22 was funded with government subsidies, and AAG was owed USD139 million as of 4Q22 through FONINVEMEM, an Argentine sovereign-owned fund.

Uncertain Regulatory Environment: The electricity market remains a priority of the Argentine government. Further regulatory reform is highly probable to reduce costs and prevent the system from becoming insolvent. Fitch estimates the government transferred USD8.4 billion in funds to CAMMESA in 2022, which represented 65% of the total implied cost of the system of USD12.9 billion. Fitch expects the portion of the system that is subsidized will remain elevated in spite of 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%.

Medium-Term Deleveraging Expected: AAG's leverage will decline to 1.5x, in dollar terms, by 2024 as the company uses its operating cash flow and FONINVEMEM collections to pay off the majority of its 2024 bond and other loans at maturity. Projected 2022 results point to slight weakening of the company's credit metrics, with gross leverage increasing to 3.0x in 2022 from 2.7x in 2021. The increase was largely due to a one-time increase in uncollected receivables for which AAG is expected to be compensated. By 2023, leverage is anticipated to decline to 1.9x following a roughly 40% yoy increased EBITDA margin.

Base Energy Inflation Adjustment: The indexation of Energia Base will be important for AAG and other producers, whose revenue is nearly 80% derived from Energia Base when FONINVEMEM collections are considered. With Resolution 31/2020, Base Energy was pesified, or denominated in Argentine pesos, at an effective rate of ARS60 per U.S. dollar.

Resolution 440/2021 took effect in February 2021 and provided a roughly 30% upward adjustment, or 60% of ARS inflation, in rates over Resolution 31/2020. In April 2022 and December 2022, resolutions 238/2022 and 826/2022 took effect and provided retroactive tariff adjustments of the Energia Base legacy assets, and in February 2023 resolution 59/2023 took effect allowing combined cycle power plants on the Energia Base to sign five-year PPAs with CAMMESA with a partially dollarized rate.

FONINVEMEM Receivables in Place: AAG's EBITDA generation was affected by the pesification of Base Energy but has been, and will be compensated by the company's receivables from its FONINVEMEM investments with USD33 million received through 3Q22. Upon repayment of the outstanding roughly USD149 million owed to AAG as of 3Q22, 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.

Hydro Concession Expirations: The expiration of concessions for key hydro assets will lower the company's future EBITDA to below USD100 million in 2024. The concession for the 1,050MW Alicura hydro plant on the Limay River is set to expire on August 10, 2023, which Fitch estimates will lower revenue by USD17 million on a full-year basis. Nevertheless, the concession for the Alicura plant may be extended for an additional year. 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.

Low Commodity Price Impact: AAG's exposure to rising global commodity prices will be low. The company's revenue comes primarily from Base Energy, which is the country's spot market framework whose participants have their fuel sourced and paid for by CAMMESA. While the coal used in the San Nicolas plant is sourced internationally, namely from Colombia, Australia and South Africa and is part of AAG's cost structure, its cost is entirely reimbursed by CAMMESA in the company's revenue. 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: AAG's ratings are based on its standalone credit profile, as overall legal, operational and strategic incentives to its parent company AES Corporation (IDR BBB-/Stable) to support AAG, if needed, are low. AAG is fully-owned by the 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 stand-alone basis.

Derivation Summary

AES Argentina's Long-Term FC and LC IDRs reflect the company's 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 space, with the flexibility of having its own natural gas reserves to supply its 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 year-end 2021 was 2.7x, compared with Pampa at 1.6x, Genneia at 3.9x, Generacion Mediterranea S.A. (CCC-) at 5.6x, MSU Energy S.A. (CCC-) at 5.1x and Capex at 1.7x as of Oct. 31, 2021. On a net basis, AAG's leverage was 2.3x in 2021, reflecting USD46 million of cash and equivalents. Fitch estimates that AAG's projected gross leverage will average 1.6x in the medium term, below its Argentine peers' median of 3.0x.

Key Assumptions

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

Gross generation of approximately 9,500GWh during 2022, falling to roughly 7,800GWh in 2024 after the expiration of the Alicura hydro concession in 2023;

AAG achieves generation capacity factors of 45% for thermal assets, 20% for hydro and 45% for wind during the rating horizon;

20% rise in coal unit costs in 2022 versus 2021, to be reimbursed by CAMMESA. Costs will fall to historical average thereafter;

Average annual maintenance capex of USD16.5 million over rating horizon;

No dividend payments until 2024 when annual payments of USD1 million begin;

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

Majority of outstanding USD300 million bond due 2024 is refinanced within capital controls restrictions.

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 the subsidies from CAMMESA, any further regulatory developments leading to a more independent market less reliant on support from the Argentine government could positively affect the company's collections/cash flow.

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

A downgrade of AES Argentina 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 that the ratings of AES Argentina are linked to those of the Argentine sovereign at 'CCC-' due to the high reliance on government subsidies to the electricity sector.

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 Sept. 30, 2022, AAG reported available cash of ARS9,903 million (approximately USD79.5 million) covering one year of interest expense, assuming no additional debt is raised. Fitch expects the company will be able to comply with the central bank capital controls limiting corporates' access to the foreign exchange market. Although the rules were extended through the end of 2023, AAG's only financial obligation subject to the rule is its USD300 million bond due in 2024. Fitch expects the company to conduct an exchange to extend the debt maturity for this bond.

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

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

(C) 2023 Electronic News Publishing, source ENP Newswire