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