Fitch Affirms Itabo's IDRs at 'B-'; Outlook Stable

CHICAGO & BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has affirmed Empresa Generadora de Electricidad Itabo, S.A.'s (Itabo) international foreign and local currency Issuer Default Ratings (IDRs) at 'B-'. The rating action applies to US$125 million in notes due 2013 issued by Itabo Finance S.A. The senior unsecured is also affirmed at 'B-/RR4'. Concurrently, Fitch has affirmed Itabo's 'BBB(dom)' national scale rating. The Outlook for all ratings is Stable.

Itabo's ratings reflect the risks of operating electric generation assets in the Dominican Republic (DR) and are constrained by the systemic risks of the sector. Itabo sells electricity to government-owned distribution companies, which continue to report poor operating and financial results, and are characterized by very high energy losses, low end-user collections, and large government subsidies. Such conditions have kept distribution companies from effectively transferring cash to the country's generation companies, and the government subsidies continue to cover this gap during recent years. The ratings of the generators have remained one notch below that of the sovereign as government subsidies to the sector are indirect and are not direct obligations of the government. In addition, the timing of the subsidies and payment by the distribution risk add to uncertainty and cash flow volatility.

The company's financial profile is considered moderately strong for the rating category and has been significantly improving in recent months. During 2008 and the first quarter of 2009, Itabo benefited from the declining coal prices as its purchase power agreements (PPAs) have a six-month lag in passing fuel price. The company has also marginally benefited from higher firm capacity allocations. Going forward, Itabo's EBITDA generation is expected to decline to levels slightly higher than those reported during 2006 and 2007 as coal prices stabilize and the company's unfavorable fuel contracts erode margins. As of the last 12 months ended March 31, 2009, Itabo's leverage had significantly improved to approximately 1.4 times (x), down from 3.9x at year-end 2007. The company's EBITDA-to-interest expenses also improved to 5.0x from 2.4x in 2007. Itabo's current liquidity position is average. On a cash flow basis, the company's credit metrics are weaker with funds from operations (FFO) to adjusted leverage of 6.5x and FFO interest coverage of 1.1x.

Itabo's ratings are supported by its strong competitive position as the lowest cost thermoelectric generator in the country. Itabo operates two low-cost, carbon-fueled electric generation units and sells electricity to three distribution companies through well-structured, long-term U.S-dollar denominated (PPAs). While multiple off-takers diversify its revenue stream, and long-dated PPAs mitigate price and volume risks, Itabo could face collection risks from the electric distribution companies, which are still in the process of improving their own losses and collection rates.

Itabo's average collection from distribution companies during 2008 was low at an average of 72%, a decline from 93% during the same period last year excluding the US$54 million of sovereign bonds the company received from the DR government during the second quarter of 2009 as payment from past-due receivables. This reduction reflects the inability of DR state-owned distribution companies to pass through increasing cost of electricity to end-users.

Distribution companies reported a modest increase in the cash recovery index during 2008 to 63.9% from 59.8% the previous year. This means that of all the electricity that goes into the national grid, only 63.9% is paid for and the balance disappears as theft, nonpayment, free electricity and technical losses.

During 2009, the Dominican Republic government reiterated its commitment to the sector by paying approximately US$250 million of past-due payables to generation companies with sovereign bonds. The sector deficit for 2009 has been estimated at approximately US$700 million or 1.5% of gross domestic product. DR ranks fourth among countries with the highest electricity losses worldwide, after Congo, its neighbor Haiti, and Moldavia. Over the next few years, Fitch expects the government to continue to support the sector via subsidies and the sector to slowly recover.

Itabo is a thermo-electric generator in the DR and the second largest generation plant in the country. The company has a total installed capacity 294.5 megawatts (MW) of thermo-electric generation as of December 2008. The company is currently owned 50% by AES Corp.'s subsidiary and 49.97% by the DR government, which has one seat on the board of directors. The balance is owned by former employees of CDE (Corporacion Dominicana de Electricidad). AES Dominicana manages the company under a management contract, for a fee of 2.95% of Itabo's sales, while AES Corp. indirectly controls Itabo's management board.

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