CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed AES Andres Dominicana's SPV. (AES Dominicana) Long-Term Issuer Default Rating (IDR) at 'B' and its senior unsecured bond rating due 2020 at 'B/RR4'. Concurrently, Fitch has affirmed AES Andres B.V. national rating at 'A-(dom)'. The Outlook on the Long-Term IDR is positive.
AES Dominicana`s ratings reflect the electricity sector's high dependency on transfers from the central government to service its financial obligations. Although Fitch expects the continuation of recent policy changes to allow distribution companies (EDEs) to reach breakeven cash flow generation in the medium term, the expiration of the stand-by arrangement (SBA) with the International Monetary Fund (IMF) on Feb. 28, 2012 and the presidential elections in May 2012 hold the potential to derail the modest progress achieved by the sector so far. AES Dominicana's credit quality also reflects the company's linkage to the Dominican Republic Government (Fitch IDR 'B'; Outlook Positive) as public transfers are necessary to pay for the company's account receivables associated to electricity sales. The company's ratings also consider the company's solid asset portfolio, strong balance sheet and well structured PPAs, which contribute to strong cash flow generation and bolster liquidity.
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. During 2009, the Dominican Republic government entered into a stand-by agreement with the IMF to aid the country run counter cyclical fiscal policies.
As part of this arrangement, the government committed itself to increase metered users, gradually reduce the gap between the technical tariff and the implemented tariff; eliminate the free electricity areas (PRA) and substitute this program with more efficient demand subsidies. The arrangement also included a reduction in the account payables with generation companies to no more than 45 days of sales, a reduction from a previous average of approximately 180 days in 2008. Although the government did not succeed in meeting all the goals, it at least reduced the amount of payables due to generation companies, which strengthened generators' liquidity and cash flow generation.
Transition Risk
There is a latent risk of disrupting the progress the sector has achieved so far as the SBA with the IMF expires and the country goes through a presidential electoral year. The expiration of the SBA with the IMF removes the third party pressure on the government to stay current on its payments to generation companies and there is no guaranty that the new administration will have the same willingness to overcome the structural problems that affect the financial sustainability of the country's electricity sector. Fitch will closely monitor these events to determine the impact of any potential change on the credit quality of all generation companies in the Dominican Republic.
Recent Payments Bolster Liquidity
AES Dominicana received two extraordinary payments from the government during the months of October and December 2011 (USD 19 million and USD 37.5 million, respectively). These payments contributed to maintaining days-of-Sale (DOS) within the agreed target of 45 days and ensured a payment rate from distribution companies of 101% by Dec. 31, 2011.
Solid Portfolio of Assets
AES Dominicana's ratings reflect its high quality assets, consisting of Andres and DPP. These plants have an aggregate effective generating capacity of 540 MW. Andres is the company's newest and most efficient power plant. It ranks among the lowest cost electricity generators in the country. Andres' combined-cycle plant burns natural gas and is expected to be fully dispatched as a base-load unit as long as the LNG price is not more than 15% higher than the price of imported fuel oil No. 6.
Well Structured PPAs
The company's operating profits are healthy due to well structured, U.S. dollar denominated Power Purchase Agreement (PPA) with EDE Este, a Dominican distribution company. The increase in the participation of non-regulated users in its client base and its income diversification strategy, which is achieved through incremental sales of natural gas also support the ratings. AES Dominicana owns the only liquefied natural gas import terminal in the country with a storage and daily transportation capacity of 160,000 m3 and 6,000 m3 respectively.
Strong Standalone Credit Profile
AES Dominicana has a strong standalone credit profile for the rating category. The company generated USD193 million of EBITDA during the last-twelve-month period ended Sept. 30, 2011. This is already above the EBITDA posted by the end of FY 2010. AES Dominicana's cash flow measures have also improved. The company reported FFO of approximately USD186 million and CFO of USD 150 million during the same period. The company can comfortably meet its annual debt service using some of its USD163 million cash holdings. With only USD168 million of total debt, AES Dominicana's leverage, as measured by total debt to EBITDA, is low at 0.9x.
Fitch affirms the following ratings:
--AES Andres Dominicana's Long-Term IDR at 'B';
--AES Andres Dominicana's Long-Term bond rating at 'B';
--AES Andres B.V. Long-Term National Rating at 'A-(dom)'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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