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Rating Action:

Moody's upgrades AES Corporation's senior unsecured rating to Baa3 from Ba1; stable outlook

05 May 2022

Approximately $4.4 billion of debt securities affected

New York, May 05, 2022 -- Moody's Investors Service ("Moody's") upgraded the senior unsecured rating of The AES Corporation (AES) to Baa3 from Ba1. At the same time, Moody's withdrew AES' Ba1 corporate family rating (CFR), Ba1-PD probability of default rating and SGL-2 Speculative Grade Liquidity rating. This action concludes the review of the company's ratings that began on March 14, 2022. The outlook is stable.

A full list of affected ratings can be found at the end of this press release

RATINGS RATIONALE

"The upgrade of AES to Baa3 reflects the company's improved credit metrics and our view that they will remain supportive of an investment grade rating, including a ratio of CFO pre-W/C to net debt above 14%" said Natividad Martel, Vice President -- Senior Analyst. ""Although the ratio will likely weaken from its peak of around 18% in 2021, we expect that it will be in the 14.5-15.5% range during the 2023-2024 period, providing some financial flexibility to cope with unexpected events", added Martel.

AES' Baa3 rating also considers the updated decarbonization strategy of the company, a key environmental consideration and an important driver of the organization's credit quality going forward. AES recently accelerated its planned exit from coal-fired generation to year-end 2025, which will be done through fuel conversions, retirements or additional asset sales. Concurrently, AES will also continue an elevated investment program to further expand its renewable and battery storage footprint, and to a lesser extent its natural gas operations. We expect that the incremental cash flow from these investments will help AES offset the impact of the foregone cash flow that would have been generated by subsidiaries previously expected to operate coal plants beyond 2025.

For example, we expect that the conclusion of Indianapolis Power & Light Company's (IPL; Baa1 stable) Integrated Resource Plan (IRP) proceeding by early 2023 will provide visibility into whether the last coal-fired units at its Saint Petersburg plant will be retired or converted to natural gas. In addition, Bulgarian subsidiary Maritza's power purchase agreement is scheduled to expire in 2026. Finally, the progress made by AES Andes S.A. (Baa3 stable) in the implementation of its Greentegra strategy should allow it decarbonize its energy-mix without jeopardizing the visibility of its contracted cash flows.

AES' Baa3 rating is supported by the scale and diversification benefits provided by a large number of subsidiaries (over 50) that currently operate in twelve countries. However, the company's significant investments in the US, largely through AES Clean Energy and the regulated utility subsidiaries IPL and Dayton Power & Light Company (DP&L; Baa2 stable) will represent over 40% of the consolidated CFO pre-W/C and nearly 50% of the EBITDA by year-end 2022, making it's US operations an increasingly important driver of credit quality going forward.

We note that the upgrade of AES considers the uncertainty surrounding DP&L's currently pending rate case in Ohio and the potential that the outcome could be credit negative for the utility and detrimental to AES' business risk profile. However, DP&L accounts for less than 10% of AES' consolidated cash flow and we have determined a negative outcome would have only a limited impact on AES' consolidated financial performance and would not jeopardize its investment grade rating.

The stable outlook for AES considers the long-term contracted operations of its independent power producer (IPP) and project subsidiaries in both the US and in emerging markets and the resulting visibility of the organization's cash flow. In addition, the shift in growth strategy to largely renewables and batteries has reduced the complexity of the subsidiaries' construction programs and the risk that current supply chain challenges will affect their ability to complete the projects on time and budget. The stable outlook reflects the company's plan to fund these investments largely with amortizing project debt, tax equity partnerships in the US and equity contributions from the parent such and our expectation that consolidated credit metrics will remain supportive of the current Baa3 rating.

The stable outlook anticipates that AES will maintain an adequate liquidity profile and that structural subordination risk will remain limited amid a relatively modest reliance on holding company bullet debt to fund capital requirements. Specifically, we expect that the ratio of parent company debt to consolidated debt will remain below 20%, and that the ratio of CFO pre-W/C to debt will range between 14.5-15.5%, on a sustained basis, during the 2022-2025 period. As per Moody's Hybrid Equity Credit methodology, following the upgrade of AES to investment grade, we will now apply 50% equity treatment to AES' $1 billion of preferred stock for the purpose of calculating financial ratios, compared to the previous 100% equity treatment applied while AES was non-investment grade.

Liquidity

AES has an adequate liquidity profile underpinned by upstreamed dividends from its diversified and large number of subsidiaries as well as AES' access to a $1.25 billion committed revolving credit facility. This facility is scheduled to expire in September 2026 and, at the end of March 2022, AES had $621 million available. Following last year's amendments to the facility, borrowings are not subject to any conditionality, including a material adverse change clause representation for borrowings, a credit positive. The facility is subject to one financial covenant, namely a maximum recourse debt to cash flow ratio of not more than 5.75x (both metrics calculated on a parent only basis). We anticipate that AES will remain in compliance with substantial headroom.

Our analysis of AES also considers that the majority of the subsidiaries operating outside of the US have a long track-record of keeping material amounts of cash balances to meet their liquidity requirements and that dividend distributions occur after servicing their debt, including scheduled amortizations of project debt.

AES has disclosed its plans to issue up to $1.3 billion in holding company debt during the 2022-2025 period following the $1 billion preferred stock issued in March 2021. AES' next parent debt maturity consists of $900 million of senior unsecured notes due in July 2025.

Earlier this year, management disclosed that it expects that AES' free cash flow (that is, dividends received minus parent company costs such as interest payments) will approximate $900 million in 2022 while it also expects to receive proceeds from the pending sale of assets in Vietnam and Jordan that will range between $500 and $700 million. AES anticipates using this cash flow largely to fund investments ranging between $835 and $1,135 million in its subsidiaries' capital expenditures programs while it will dividend nearly $500 million to shareholders.

AES has also disclosed that, during the 2022-2025 period, it expects to have access to around $6.3 billion of discretionary cash that includes nearly $4 billion of parent free cash flow (that is, dividends received minus parent company costs such as interest payments) and total net proceeds from asset sales of around $1 billion (including the aforementioned proceeds). AES has also disclosed that it plans to use these funds to make equity contributions to its subsidiaries of $3.8 billion and to distribute around $2 billion.

ESG Considerations

AES' ESG Credit Impact Score is moderately negative (CIS-3), where its ESG attributes are overall considered as having a limited impact on the current rating.

AES' moderately negative environmental risks (E-3 issuer profile score) reflect its continued exposure to fossil-fueled fired generation going forward despite the company's updated plan to exit coal-fired generation by year-end 2025, through either the sale, retirement or conversion of the existing plants to natural gas. Carbon transition risk is mitigated by the company's long-term contracted power generation operations and the company's focus on growing its renewable and battery storage footprint. Another factor that weighs on AES' environmental risk is its exposure to physical climate risk balanced with the group's geographically diversified operations with subsidiaries operating in twelve countries across the globe.

Moody's has decided to withdraw the ratings for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Upgrades:

..Issuer: AES Corporation, (The)

....Pref. Stock Preferred Stock, Upgraded to Ba2 from Ba3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1 (LGD4)

Withdrawals:

..Issuer: AES Corporation, (The)

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-2

.... Corporate Family Rating, Withdrawn , previously rated Ba1

Outlook Actions:

..Issuer: AES Corporation, (The)

....Outlook, Changed To Stable From Rating Under Review

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

Assuming no significant deterioration in the business risk profile, for example, in terms of cash flows visibility upon the implementation of the decarbonization strategy, an upgrade of AES' ratings is possible if it continues its thus far successful transition to a more renewable energy organization, either of its two US utility subsidiaries is upgraded, or consolidated debt is reduced materially, and it is able to generate a ratio of consolidated CFO pre-W/C to net debt above 17%, on a sustained basis.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A downgrade could occur if AES diverges from its current business strategy or there is a material deterioration in one or more of its core subsidiaries' credit quality. The implementation of more aggressive financial policies that adversely affect any of the key subsidiaries or a failure of AES to maintain a consolidated ratio of CFO pre-W/C to net debt of at least 14% could also lead to a downgrade. An increase in the ratio of holding company debt to consolidated debt that substantially exceeds 20% for a sustained period of time, could also cause a downgrade.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Arlington, AES Corporation is a globally diversified power holding company that holds interests in a large portfolio of subsidiaries that operate in twelve countries. These subsidiaries consist of (i) regulated utility subsidiaries (three) and (ii) power generation projects and independent power producers (IPPs). Their total generation capacity exceeds 30,000 MW. AES organizes these subsidiaries under four Strategic Business Units (SBU), largely based on the subsidiaries' geographic operations: (i) US and utilities, (ii) South America, (iii) Mexico, Central America and the Caribbean (MCAC) and (iv) Eurasia. From a strategic perspective, the "other not consolidated" segment (not included not included in any of the aforementioned SBUs), includes Fluence Energy, LLC, a global energy storage technology and services joint venture.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Michael G. Haggarty
Associate Managing Director
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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