CHICAGO & CARACAS, Venezuela--()--Fitch Ratings has affirmed Itabo Dominicana SPV's (ITABO) Foreign Currency and Local Currency IDRs at 'B' with a Stable Outlook. A full list of rating actions follows at the end of this release.
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 expiration of the stand-by arrangement (SBA) with the International Monetary Fund (IMF) 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.
The electricity sector registered energy losses of 31.9% and an average collection rate of 89.8% both by October 2012, rendering the cash generation capacity of the distribution companies very weak as evidenced by a Cash Recovery Index of 61.2%, 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 (see Fitch, Dec. 11th, 2012).
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.
The company continued to post increasing EBITDA generation during the LTM period ended September 2012. EBITDA increased to USD 60 million by the end of third quarter 2012 from USD 27 million in FY2011. The operational profitability's recovery follows the implementation of its coal purchasing strategy that leverages the support of the AES Corp. to optimize contractual terms and ensure increasing operational returns. Given the current trend in coal prices, Fitch expects the company to continue strengthening its operation and financial results based on the support strategy commented above.
This positive EBITDA evolution translated into adequate credit metrics as evidenced by net leverage and coverage indicators with respect to EBITDA of 0.3x and 2.3x respectively by September 2012. 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.
For the LTM September 2012, ITABO generated USD100 million of CFFO, above the USD14 million posted in FY2011. This result is explained not only by the recuperation of operational results but also by the recent payment received from the government in September 2012 to pay down account receivable arrears which, in turn, reduced ITABO's Days of Sale to approximately 72 days. The government had to finance this payment with a local bond placement given its current fiscal vulnerabilities and weak cash generation capacity affecting the sector. Fitch expects the continuation of arrears accumulation to add further volatility to ITABO's cash flow generation in the future.
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 Sep. 30, 2012, ITABO's cash and marketable security holdings stood at of USD109 million providing ample liquidity cushion to meet operational and financial needs.
Fitch affirms ITABO's ratings as follows:
--ITABO Dominicana SPV's FC IDR at 'B'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's FC and LC IDRs at 'B'; Stable Outlook;
--ITABO Dominicana SPV's bond issuance maturing in 2020 at 'B/RR4';
--Empresa Generadora de Electricidad ITABO's National Long-Term issuer Rating at 'A-(dom)'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's local bond 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 08, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology