NEW YORK--(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 to that of the sovereign. Low collections from end-users as well as high electricity losses and subsidies 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. ITABO's ratings also consider its low-cost generation portfolio, strong balance sheet and well-structured purchased power agreements (PPAs), which contribute to strong cash flow generation and bolster liquidity.
Sector's Dependence on Government Transfers
High energy distribution losses (above 30% in the last five years), low level of collections and important subsidies for end users have created a strong dependence on government transfers. This dependence has been exacerbated by country's exposure to fluctuations in fossil-fuel prices and robust energy demand growth (4.8% CAGR in 2009-2013). The regular delays in government transfers pressure working capital needs of generators and add volatility to their cash flows. This situation increases the sector's risk, 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 lowest 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 (San Lorenzo) and sells electricity to three distribution companies in the country through long-term U.S. dollar- denominated PPAs. The company expects to remain as a base load generator even after a 700 MW coal generation project, sponsored by the government, begins operations by 2017. Fitch expects the impairment of the San Lorenzo plant, which occurred in 2013, will not materially affect the company's cash-generation capacity.
Adequate Credit Metrics
The company presents strong credit metrics for the rating category. Leverage, measured as total debt to EBITDA, fell to 1.8x at March 2014 from 2.4x at December 2012. In the same period, EBITDA increased to USD63.7 million from USD 54.1 million, while the EBITDA margin fell to 28.6% from 22.5%. This improvement was driven mainly by lower prices of coal and lower purchases of energy in the spot market (as a result of increased generation resulting from fewer plant stoppages). Net results for 2013 were affected by a reversion of interest expenses of USD10.4 million and an asset impairment of USD 16.2 million (San Lorenzo unit).
For the LTM ended in March 2013, ITABO generated USD60.2 million of cash flow from operations (CFFO), above the USD33 million posted in FY2012. This improvement derived from the increased EBITDA and the sale of long-term receivables owed by DisCos for USD21.1 million. However, like other generators in the country, the company struggles to collect receivables from distribution companies. At the end of first-quarter 2014, days of sale (DOS) stood at 91 days (vs. 143 in December 2013). 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 six-year average life which properly contributes to the reduction of liquidity risk. As of March 31, 2014, ITABO's cash and marketable security holdings stood at USD88 million, providing ample liquidity cushion to meet operational and financial needs.
A positive rating action could follow if the Dominican Republic's sovereign ratings are upgraded or if the sector achieves financial sustainability through proper 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 outstanding notes due in 2020 at 'B/RR4'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage