CARACAS, Venezuela--(BUSINESS WIRE)--Fitch Ratings has upgraded AES Andres Dominicana SPV's (AES Dominicana), Empresa Generadora de Electricidad Haina's (EGE Haina) and Itabo Dominicana SPV's (Itabo) foreign currency and local currency Issuer Default Ratings (IDRs), as well as their respective long-term debt ratings, to 'B' from 'B-'. The Recovery Rating for all issuances is RR4. All companies' rating outlook has been revised to Positive from Stable.
These rating actions follow this month's Rating Outlook revision of the Dominican Republic's Sovereign ratings to Positive from Stable as well as the positive impact of recent policy changes. Over the past year, the Dominican Republic government has implemented changes aimed at strengthening the operational and financial viability of the electricity sector in the country. The Dominican generating companies' (Gencos) ratings reflect recent positive operational and financial results stemming from sector policy implementation that signals the beginning of what is expected to be a gradual recovery to self-sustainability.
Although Dominican Gencos continue to reflect the electricity sector's high dependency on transfers from the central government to service its financial obligations, Fitch expects the continuation of recent policy changes to allow distribution companies (EDEs)to reach breakeven cash flow generation during 2012. Policy changes include: i) an 11% tariff adjustment on the price of electricity during December 2010; ii) a significant reduction of the Government's debt with Gencos; and iii) the incorporation of 521,492 metered users that previously did not pay for their electricity consumption by December 2010 (87% of the International Monetary Fund's [IMF] stand-by arrangement [SBA] target). This has provided the distribution companies with higher collections in support of better operational results and therefore bolstered the Gencos' cash flow generation.
The rating actions follow the country's economic resilience during the global financial crisis, which was supported by an SBA with the IMF, improving export prospects, and structural improvements in debt management. Fitch believes these developments will support the maintenance of macroeconomic stability within an environment of robust growth of around 6% over the medium-term, further enhancing the positive outlook of the electricity sector.
Notwithstanding this positive trend, the electricity sector continues to register an important deficit, which amounted to USD721 million during January - October 2010. Of this, USD491 million corresponded to the operational deficit of the distribution companies. Similarly, the sector's deficit amounted to USD652 million for the same period in 2009, of which the EDEs' deficit amounted to USD449 million.
Going forward, Fitch will continue to closely monitor the performance of the electricity sector, in particular as the year 2012 approaches, the year in which the IMF's SBA expires and the country will hold presidential elections. These factors make 2012 a critical year for the electricity sector as the change in authority poses transition risks that could stall the progress so far achieved. The government's commitment to the continuation of the structural reforms initiated under the umbrella of the IMF is key to ensuring the financial self-sustainability of the electricity sector.
Ratings Constrained by Credit Quality of the Government:
The Dominican Republic's power sector is characterized by low collections from end-users and high electricity losses. Such conditions have kept distribution companies from effectively transferring cash to the country's generation companies, and the government subsidies have covered this gap during recent years. This links the credit quality of the distribution and generation companies in the country to that of the sovereign.
IMF Agreement Positive for Generators:
The agreement signed with the IMF seeks to gradually eliminate the tariff deficit; increase the cash recovery index (CRI) to 70%, from the historical 50%, by incorporating approximately 600,000 non-paying users into paying and metered users; and eliminate free electricity (PRA) zones. The agreement should also result in focused subsidies and the creation of a central account to pay all generation companies.
Under terms of the agreement, Gencos should now be paid by the government within 45 days. This compares with an average of approximately 170 to 200 days during the past few years. The new management team of the distribution companies has adhered to the recently revised electricity law and has also implemented loss reduction programs such as the zero debt- zero theft initiative.
Strong Credit Protection Measures:
In general, the Dominican Republic electricity generation companies have benefited from the recent implementation of the IMF's SBA, which includes certain structural policy changes aimed at strengthening the sector's operation and financial performance. In particular, the government has remained current in its payments to all Gencos, which in turn has contributed to cash flow generation.
AES Dominicana (i.e. the consolidation of AES Andres and DDP) generated approximately US$160 million of EBITDA during the latest 12 months (LTM) ended Sept. 30, 2010. The company reported cash flow from operations (CFO) of approximately US$70 million during the same period. The company can meet its annual debt service of approximately US$12 million with CFO or by using some of its US$102 million cash holdings.
EGE Haina generated approximately US$71 million of EBITDA during the LTM ended Sept. 30, 2010. The company reported CFO of approximately US$60 million during the same period. The company can comfortably meet its annual debt service of with CFO or by using some of its US$69 million cash holdings.
Similarly, Itabo shows a strong credit profile for the rating category, although its EBITDA and credit metrics have been temporarily affected by an adverse price contract that increased its coal cash cost. Going forward, the company's financial performance is expected to improve once existing coal contracts wind down and its cost structure is aligned with current fuel market prices. The company generated approximately US$8 million of EBITDA during the LTM ended Sept. 30, 2010, while it registered CFO that more than covered the company's debt service during the same period. These figures mainly reflect high positive cash flows during the beginning of 2010 and end of 2009.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Fitch's Approach to Rating Competitive Generators' (July 24, 2007);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009);
--'Country-Specific Treatment of Recovery Ratings - Revised' (Aug. 21, 2006).
--'Fitch Revises Outlook to Positive for Dominican Republic's Ratings; Affirms L-T IDRs at B' (Jan. 05, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Fitch's Approach to Rating Competitive Generators
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=333818
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
Country-Specific Treatment of Recovery Ratings - Revised
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=286306
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.