CHICAGO--()--Fitch Ratings has affirmed AES Andres Dominicana SPV's (AES Dominicana) Foreign Currency IDR at 'B', with a Stable Outlook. Please see below for a full list of rating actions.
AES Dominicana'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 these 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. 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.
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.
AES Dominicana's ratings reflect its high-quality generation assets, consisting of Andres and DPP with 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.
The company continued to post strong credit metrics in spite of the 25.6% EBITDA contraction registered during the LTM period ended September 2012. EBITDA fell to USD136 million during this LTM, from USD183 million in FY2011 due to higher fuel costs and energy purchases during the period. Still, the company posted leverage and coverage indicators with respect to EBITDA of 1.2x and 7.2x, respectively, by September 2012 - metrics considered to be conservative for the rating category.
Government delays in transferring funds to cover the sector's deficit continue to pressure the company's cash flow. For the LTM September 2012, AES Dominicana generated USD50 million of cash flow from operations (CFFO), below the USD63 million posted in FY2011. Days of Sale (DOS) outstanding totaled 75 days for Andres and 69 for DPP, above FY2011 results, when DOS stood at 33 and 61 days, respectively. The government was able to pay part of generation company receivables that were overdue, including AES Dominicana's receivables, improving the company?s collection rate (138%) during the third quarter 2012, above the 83% posted during the same period 2011. The payment was eventually achieved through a public bond placement in the local market after difficulties in making good on its agreed target to maintain DOS at 60 days average. Fitch expects the continuation of arrears accumulation to add further volatility to AES Dominicana's cash flow generation in the future
The company's debt structure, with a sole maturity in 2020, provides ample financial flexibility and eliminates liquidity risk. As of Sept. 30, 2012, AES Dominicana had cash and marketable security holdings of USD137 million providing ample liquidity cushion to meet operational and financial needs.
Fitch has affirmed the following:
-- AES Andres Dominicana's LT FC IDR at 'B', Outlook Stable;
-- AES Andres Dominicana's LT bond rating at 'B/RR4',
-- AES Andres B.V. LT National Rating at 'A-(dom)', Outlook Stable.
Factors that could lead to a change in the assigned ratings:
A positive rating action could follow if the DR sovereign's ratings are upgraded or if the sector achieves financial sustainability through proper policy implementation.
A negative rating action would follow if the DR sovereign's 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 and is sustained.
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