NEW YORK--(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. Concurrently, Fitch has upgraded AES Andres national long-term rating to 'A(dom)' from 'A-(dom)'; Stable Outlook. A full list of rating actions follows at the end of this release.
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 to that of the sovereign. Low collections from end-users, 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. AES Dominicana's ratings also consider its solid asset portfolio, strong balance sheet, and well-structured purchase power agreements (PPAs).
The upgrade of AES Andres national long-term rating also reflects its improving revenue diversification given its growing sales of natural gas to non-related parties and the fact that the company owns and operate the only LNG import facility in the country.
Sector's Dependence on Government Transfers
High energy distribution losses (above 30% in 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 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 risk of the 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 Dominican Power Partners DPP with an aggregate installed generating capacity of 555 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. By 2017, the aggregate capacity of AES Dominicana will increase in approximately 100 MW as result of the development of a combined cycle facility in DPP's power plant. The construction of this project would start in third quarter of 2014.
Strong Credit Metrics
The company presents strong credit metrics for the rating category. At March 2014, total debt to EBITDA was 0.7x, while net total debt to EBITDA was 0.0x. AES Dominicana plans to reduce DPP capital to approximately USD 89 million during 2014. Fitch believes this transaction will not materially affect the combined financial profile. In 2013, EBITDA increased to USD 220 million from USD 182 million and the EBITDA margin to 35.5% from 33.9%. This improvement was driven mainly by higher sales of electricity in the spot market and higher sales of natural gas.
Cash Flow Volatility Persists
The deficit of the sector and delays in government transfers continue to pressure the company's cash flow. For the LTM March 2014, AES Dominicana generated USD157 million of cash flow from operations (CFFO), above the USD45 million posted in FY2012. This increase was mainly explained by lower inventories, increased payables, higher income and lower income taxes paid. Days of sales (DOS) outstanding totalled 107 days for Andres and 93 for DPP at March 2014 (125 and 122 at December 2013). Fitch does not expect significant reductions in the collection period in the short to medium term given the deficit of the sector.
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 31, 2014, AES Dominicana had cash and marketable security holdings of USD178 million.
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 further increase of sales of natural gas outside the electricity sector may also impact positively the ratings.
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:
AES Andres Dominicana
--Long-Term FC IDR at 'B'; Outlook Stable;
--Senior Unsecured notes rating at 'B/RR4'.
Fitch has upgraded the following:
AES Andres B.V.
--Long-Term National rating to 'A(dom)' from 'A-(dom)'; Outlook Stable.
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