CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed ITABO Dominicana SPV's (ITABO) foreign currency and local currency Issuer Default Ratings (IDRs) at 'B'. The Rating Outlook is Stable. A full list of rating actions is provided at the end of this release.
KEY RATING DRIVERS
ITABO's ratings reflect the electricity sector's high dependency on transfers from the central government to service its financial obligations, a condition that links the credit quality of the distribution companies (EDEs) and generation companies in the country to that of the sovereign. Low collections from end-users and high electricity losses have undermined distribution companies' cash generation capacity, exacerbating generation companies' dependence on public funds to cover the gap produced by insufficient payments received from distribution companies.
Fitch expects the continuation of recent policy changes to allow EDEs to reach breakeven cash flow generation in the medium term. Yet, the absence of a new stand by arrangement (SBA) with the International Monetary Fund (IMF) (the last stand by expired on Feb. 28, 2012) holds the potential to derail the modest progress achieved by the sector so far. ITABO's ratings also consider its low cost generation portfolio, strong balance sheet and well structured PPAs, which contribute to strong cash flow generation and bolster liquidity.
High Losses Lead to High Risk
The electricity sector registered energy losses of 31.6% and an average collection rate of 91.1% both by November 2012, rendering the cash generation capacity of the distribution companies very weak as evidenced by a Cash Recovery Index of 62.3%, still below the target established in conjunction with the IMF of 70%. This situation reinforces the sector's dependency on public transfers and makes it a high risk sector, especially at a time of rising fiscal vulnerabilities affecting the Central Government's finances.
Low Cost Asset Portfolio
ITABO's ratings incorporate its strong competitive position as one of the lower cost thermoelectric generators in the country, ensuring the company's consistent dispatch of its generation units. The company operates two low cost coal fired thermal generating units and a third peaking plant that runs on Fuel Oil #2 and sells electricity to three distribution companies in the country through well structured long term U.S. dollar denominated PPAs.
Operational Profitability Falls
ITABO registered a 10.4% fall in its EBITDA by the end of the latest 12 months (LTM) March 2013; as it stood at USD48 million, below the USD54 million posted in fiscal year (FY) 2012. This reduction was due to: i) a major maintenance stop in Itabo's generation unit II that led to lower physical energy sales in the spot market and ii) lower coal prices used for indexing PPA contract sales; all of which translated into an 8.4% fall in annualized revenues during this period. However, going forward, Fitch expects the company to continue strengthening its operation and financial results based on the implementation of its coal purchasing strategy that leverages the support of the AES Corp. to optimize contractual terms and ensure increasing operational returns.
Adequate Credit Metrics
This EBITDA generation translated into adequate credit metrics as evidenced by net leverage and coverage indicators with respect to this aggregate of 1x and 1.8x respectively by March 2013. Fitch expects the coverage ratio to continue improving as the company succeeds in its cost optimization strategy aimed at reducing average coal prices and, consequently, generation costs.
Temporary CFFO improvement
For the LTM March 2013, ITABO generated USD85 million of CFFO, above the USD33 million posted in FY2012. This improvement was due to lower fuel inventories, higher accounts payables and to a lower buildup of account receivables in arrears, all of which reduced working capital requirements. However, like other generators in the country, the company struggles to collect receivables from distribution companies. At the end of first quarter 2013, days of sale (DOS) stood at 139 days, above the 102 DOS registered by December 2012. Fitch expects the continuation of arrears accumulation to add further volatility to ITABO's cash flow generation in the future.
Debt Structure Adds Flexibility
The company's debt structure is quite manageable with a seven year average life which properly contributes to the reduction of liquidity risk. As of March 31, 2013, ITABO's cash and marketable security holdings stood at of USD80 million providing ample liquidity cushion to meet operational and financial needs.
RATING SENSITIVITIES
Factors that could lead to a change in the assigned ratings:
A positive rating action could follow if the Dominican Republic's sovereign ratings are upgraded or if the sector achieves financial sustainability through properly policy implementation.
A negative rating action would follow if the Dominican Republic's sovereign ratings are downgraded, if further deterioration of the sector's key performance indicators reinforces the dependence on government transfers or if the company's operational and financial performance deteriorates to the point of increasing the ratio of Debt to EBITDA to 5x in a sustained fashion.
Fitch has affirmed the following ratings:
--ITABO Dominicana SPV's foreign currency IDR at 'B', Stable Outlook;
--Empresa Generadora de Electricidad Itabo, S.A.'s foreign currency and local currency IDRs at 'B', Stable Outlook;
--ITABO Dominicana SPV's bond issuance maturing in 2020 at 'B/RR4';
--Empresa Generadora de Electricidad Itabo, S.A.'s national long-term issuer rating at 'A-(dom)'; Stable Outlook;
--ITABO's local bond rating at 'A-(dom)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796021
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