AES Panama S.R.L. 'BB' Ratings Affirmed, Outlook Remains Negative

  • Low rainfall levels, combined with higher exposure to the spot market, are pressuring AES Panama's credit metrics. The higher exposure to the spot market stems from the repair of its 175 megawatt (MW) hydro-based power plant, AES Changuinola.
  • MEXICO CITY (S&P Global Ratings) April 5, 2019--S&P Global Ratings affirmed its 'BB' issuer credit and debt ratings on the Panama-based power generator.
  • The outlook remains negative, which reflects the possibility of a downgrade in the next six months if hydrology conditions in Panama weaken further and/or if AES Changuinola's repair takes longer than expected, extending AES Panama's exposure to the spot market.
We expect lower cash flows for AES Panama, given that it will be exposed to 
the spot market because of the nine-month repair stoppage of AES Changuinola 
due to a leakage in its water tunnel. As a result, the plant will be unable to 
deliver the contracted energy to AES Panama, while the latter has a long-term 
power purchase agreement (PPA) contracts with the power distribution 
companies. Therefore, the company will need to buy energy from the spot 
market. Moreover, the rainfall level was record low in December 2018, and we 
expect low hydrology in the first half of 2019. This has caused dispatch of 
thermal plants, pushing spot market prices to around $110 per megawatt per 
hour (MWh); we expect them to increase until May and to fall below $100 per 
MWh until July, when the rainy season begins. 

The 'BB' ratings continue to incorporate the company's competitive position as 
the largest power generator in Panama, offset by the historical volatility of 
profitability due to hydrological exposure. In addition, the ratings reflect 
our expectations that AES Panama's cash flow generation will remain in line 
with our expectations, with EBITDA margin of around 50% in the next three 
years. Moreover, ratings continue to incorporate our expectations of net debt 
to EBITDA below 5.0x and funds from operations (FFO) to debt around 13% for 
the next two years. Our base-case scenario assumes low hydrology in the first 
half of 2019 and normal hydrology afterwards, as well as no delays in AES 
Changuinola's repair. In our view, the company's thermal plants (including AES 
Colon) and the lower contract levels for the following years to around 80% 
mitigate the exposure to hydrology fluctuations. 

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