CHICAGO & CARACAS, Venezuela--(BUSINESS WIRE)--Fitch Ratings has affirmed AES Andres Dominicana SPV's (AES Dominicana) Foreign Currency Issuer Default Rating (IDR) at 'B', with a Stable Outlook. Please see below for a full list of rating actions.
KEY RATING DRIVERS
AES Dominicana's ratings reflect the Dominican Republic's (DR) 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 effects 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 SBA expired on Feb. 28, 2012) holds the potential to derail the modest progress achieved by the sector so far. AES Dominicana's ratings also consider its solid asset portfolio, strong balance sheet, and well-structured purchase power agreements (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% 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.
High-Quality Asset Base
AES Dominicana's ratings reflect its high-quality generation assets, which consist of Andres and DPP with an aggregate effective generating capacity of 540 MW. Andres is the company's newest and most efficient power plant, and 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 liquefied natural gas (LNG) price is not more than 15% higher than the price of imported fuel oil No. 6.
Strong Credit Metrics
The company continued to post strong credit metrics during the LTM period ended March 2013, with strong annualized EBITDA at USD177 million by the end of the first quarter of 2013. This performance translated into leverage and coverage indicators with respect to EBITDA of 0.9x and 10.2x during this period, metrics considered to be conservative for the rating category.
Cash Flow Volatility Persists
Government delays in transferring funds to cover the sector's deficit continue to pressure the company's cash flow. For the LTM March 2013, AES Dominicana generated USD104 million of cash flow from operations (CFFO), above the USD45 million posted in FY2012. However; days of sales (DOS) outstanding totaled 85 days for Andres and 88 for DPP, above the targeted average DOS objective of 60 days. Fitch expects the continuation of arrears accumulation to add further volatility to AES Dominicana's cash flow generation in the future.
Debt Structure Adds Flexibility
The company's debt structure with a single maturity in 2020 provides ample financial flexibility and eliminates liquidity risk. As of March 30, 2013, AES Dominicana had cash and marketable security holdings of USD135 million and USD27.5 million in available lines of credit, providing an ample liquidity cushion to meet operational and financial needs.
Rating Sensitivities
A positive rating action could follow if the DR's sovereign ratings are upgraded or if the electricity sector achieves financial sustainability through proper policy implementation.
A negative rating action would follow if the DR'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 for a sustained amount of time.
Fitch has affirmed the following ratings:
--AES Andres Dominicana
--LT FC IDR at 'B', Outlook Stable;
--LT bond rating at 'B/RR4'.
Fitch also affirmed:
AES Andres B.V.
--LT National rating at 'A-(dom)', Outlook Stable.
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=796026
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