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Rating Action:

Moody's Affirms AES' Ba2 CFR; Changes Rating Outlook to Positive from Stable

22 Mar 2018

Approximately $3.8 billion of rated debt affected

NOTE: On March 29, 2018, the press release was corrected as follows: in the sub-headline, the amount of rated debt affected was changed to $3.8 billion. Revised release follows.

New York, March 22, 2018 -- Moody's Investors Service, ("Moody's") today changed the rating outlook for The AES Corporation (AES) to positive from stable. At the same time, Moody's affirmed AES' Ba2 Corporate Family Rating (CFR) and Senior Unsecured Rating, the Ba2-PD Probability of Default Rating (PDR) and the Ba1 Senior Secured Bank Credit Facility. AES' speculative grade liquidity rating is affirmed at SGL-2.

RATINGS RATIONALE

"AES is taking steps to reduce its business risk and is increasing the stability and predictability of its cash flows," said Natividad Martel, Vice President -- Senior Analyst. "But consolidated financial improvements occur more slowly, and are harder to see due to the complexity of the organizational structure."

The change in rating outlook reflects the progress being made for a number of projects that are still under construction, including the re-negotiation of the construction contract with Strabag AG (not rated), which reduces the geological risk exposure of AES Gener S.A's (Baa3 negative) hydro-electric Alto Maipo plant.

The positive outlook also considers the more contracted nature of AES' portfolio of new assets, lengthening the weighted averaged of the remaining contracts to approximately 10 years from 7 years on a pro-forma basis. This contract lengthening enhances cash flow visibility and predictability of distributions to AES. This increased weighted contract life incorporates a view that the Southland repowering project, expected to be operational in 2020 and 2021, will operate under a 20-year power purchase agreement with Southern California Edison Company (A2 stable). It should be noted that AES is also shifting its corporate strategies to be more climate friendly, by increasing its focus on renewable energy supplies, including battery storage technologies and exiting its merchant coal-fired power generation businesses.

AES' Ba2 CFR reflects management's more credit friendly financial policies with respect to its funding sources. The recent decision to reduce net parent company debt by $840 million with the proceeds received from the sale of its Philippine assets on 20 March 2018, is credit positive and was a material factor in the change in rating outlook. This debt retirement is equal to approximately 18% of the nearly $4.7 billion holding company debt (and approximately 4% of total consolidated debt) that was outstanding at year-end 2017.

Moody's notes that there is a material difference in the analytical approach used by management to operate its business and how Moody's examines AES' credit analysis. AES has a track-record of walking away from certain assets and manages its business by focusing on the parent only operating cash flows (POCF, defined as dividends received from subsidiaries excluding interest and other parent company expenses). From the POCF perspective, the holding company debt reduction will drive an improvement in AES' ratio of POCF to parent only debt to approximately 17% by year-end 2018 from around 14% at year-end 2017. The ratio is expected to further improve to around 20% in 2019 and over 20% in 2020. This additional improvement is largely driven by the distributions from the new projects after they start operations over the next years, additional cost savings and lower interest expenses largely contribute to this improvement.

From a credit perspective, Moody's primarily focuses on AES' consolidated profile, which generated approximately $2.5 billion in cash flow in 2017 on top of roughly $21 billion of debt. The consolidated credit analysis is important because it represents the fundamental leverage position and credit quality of the corporate family. Moreover, AES has established a track-record of indirectly supporting its different subsidiaries through dividend reductions, for example its utility subsidiaries AES El Salvador Trust II bis (B2 stable) and Dayton Power and Light Company (Baa3 positive). Importantly, key subsidiaries have also benefited from AES through revised distribution policies when they face construction challenges or delays, if the projects are deemed economic. Recent examples include, AES Gener's Alto Maipo hydro-generation project or Indianapolis Power and Light Company's (Baa1 stable) Eagle Valley combined cycle natural gas plant.

The positive outlook reflects the better quality of AES' consolidated cash flows and anticipates a progressive improvement in the consolidated credit metrics, albeit at a slower pace compared to the improvement in parent only metrics. Over the next two years, Moody's estimates that AES will produce a ratio of consolidated funds from operations (FFO) to consolidated debt in the mid-teens range, compared to approximately 12% at year-end 2017. Incremental debt to finance the completion of the group's highly leveraged projects will dampen some of the positive effect on the consolidated credit metrics that result from the combination of the cash generated by the new projects once operational, scheduled debt amortization and the ongoing cost saving and deleveraging initiatives at several of AES' existing subsidiaries.

AES' Ba2 CFR is tempered by the company's exposure to emerging markets, particularly in non-investment grade countries, and the counterparty risk exposure of these assets. These subsidiaries are expected to maintain a material amount of distributions, at over 30% of the total subsidiary distributions received by AES. The rating is also constrained by the complexity of the organizational structure and its balance sheet. There are many partial ownership investments in subsidiaries across the AES corporate family, and the accounting provisions may not provide an accurate reflection of how leverage is being used across the capital structures from a credit perspective. However, these considerations are largely being offset by the benefits from AES' diversification. The company has operations in fifteen countries, across over 50 separate subsidiaries. This diversification reduces the exposure to a single entity to help meet the parent only capital requirements.

Liquidity Profile

AES' liquidity remains adequate. The speculative grade liquidity rating of SGL-2 reflects good liquidity prospects for the next twelve months based on the expectation that the parent will remain free cash flow positive over the next twelve month. This expectation considers AES' subsidiary track-record of consistently up-streaming aggregate dividends in excess of $1 billion to the parent holding company. In addition, AES' plans for additional cost savings of $100 million along with the reduction in its interest expenses following the two recent Notes cash tender offers. This should allow AES to record a minimum POCF ranging between $600 million and $675 million in 2018. AES has further disclosed that it has earmarked $250 million in investments in its subsidiaries and $344 million for dividend distributions.

AES will use the $1 billion net proceeds received from the sale of its Philippine assets to reduce debt, including the repayment of $207 million borrowings that were outstanding under the credit facility at year-end 2017. The SGL-2 also considers that AES increased the size of its committed bank credit facility to $1.1 billion from $800 million. The facility is scheduled to expire in 2020 and 2021. The SGL-2 also anticipates that AES will remain in compliance with substantial headroom with the two financial covenant requirements: a minimum parent operating cash flow coverage and a maximum level of recourse debt relative to cash flow. AES does not have any major debt maturities until 2021 when the 3-year $500 million 4% Notes recently issued as part of one of the cash tender offers will become due.

What Could Change the Rating - Up

AES' ratings could be upgraded if there is an improvement in the consolidated financial metrics along with the significant improvement in its parent only credit metrics. Specifically, if AES is able to record standalone POCF to standalone debt of 17% and consolidated FFO to consolidated debt of at least 13%, particularly as new projects progressively start operations. These metrics are commensurate with the low-end of the guidelines provided for the Ba-rating category under the Unregulated Utilities and Unregulated Power Companies Methodology. That said, Moody's acknowledges that AES owns interests or holds ownership stakes in some utilities, particularly Indianapolis Power & Light through IPALCO, while the contracted operations of a large portion of its generation assets enhance the visibility of the group's cash flows.

What Could Change the Rating - Down

A change in AES' strategy or more aggressive financial policies, where shareholder returns in higher leverage, or more contentious regulatory or political environments in AES' key subsidiary jurisdictions (such as Indiana) could result in a downgrade. Ratings could also be downgraded if AES' average POCF to debt and consolidated FFO to debt remain below 10% or if the parent only Retained Cash flows to standalone debt falls below 7% for an extended period.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AES is a globally diversified power holding company that owns a portfolio of electricity generation and distribution businesses in fifteen countries. In total, AES has ownership interests in approximately 35,000 MW of generating capacity across the globe and serves retail customers via its distribution subsidiaries in three countries.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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