Fitch: Dominican Republic Coal Shift Credit Neutral for GENCO

NEW YORK & BOGOTÁ, Colombia--()--The Dominican Republic's diversification of the country's energy matrix away from more expensive liquid fuels will lower the marginal cost of electricity but not affect the ratings of major Dominican private electric generators (GENCOs), Fitch Ratings says. The government's plan adds cheaper new coal capacity and sets the stage for a renegotiation of private electricity generators' power purchase agreements (PPAs) that expire between 2016 and 2018, potentially resulting in more favorable conditions for distribution companies, Fitch added.

The new coal fueled assets will add close to 700 MW of capacity and over 20% of total electricity generation, thereby contributing to lowering electricity prices of approximately USD.12 per kWh from 2017 onward, 3.7 cents below the average marginal cost registered in 2014.

AES Corporation's Dominican generation assets, which represent 23.4% of the country's installed capacity, are currently rated 'B+' by Fitch, with a Stable Outlook, with AES Andres accounting for 8.8%, Dominican Power Partners, 6.5%, and Itabo, 8.1%, and Haina's generation assets, 23.3% of total installed capacity, are rated 'A(dom)', with a Stable Outlook. Fitch expects these assets to remain competitive despite the shift to coal assets and to continue to be dispatched by merit as base load units given their proven reliability and low variable costs, ensuring their overall firm energy contribution to meet the country's peak demand.

Fitch does not expect generation companies' working capital needs to improve under the current fuel price scenario as the government may miss the opportunity to pay the sector's commercial debt. Fitch does not expect a reduction in days of sales (DOS) outstanding, which will continue to exhibit a volatile quarterly trend, in line with historical government payment behavior. Moreover, Fitch does not expect significant reductions in cash flow volatility in the medium term given the permanence of structural weaknesses, such as high energy losses, that will continue to impact the sector's financial sustainability.

Distribution companies in the country are benefiting from the downward correction in fuel prices that started during the fourth quarter of 2014. The prices of Fuel Oil # 6 (FO 6) and coal fell by 11.2% and 5.5%, respectively, during 2014. That pushed down the cost of just over half of the electricity generated in the country with these primary fuels. These declines in fuel prices also overcame the 18.8% increase in the price of natural gas during the same period, as 29% of total electricity generation was fueled with natural gas in 2014. In our view, these price declines also explain most of the 16% fall in the marginal cost of electricity in 2013 from USD0.187 per KWh to 15.7 cents in 2014.

Other factors that contributed to the fall in the marginal cost were the addition of more efficient generation assets fueled with FO # 6 and wind. For 2015, with a full 12-month impact of lower fuel prices and no expected new additions of more efficient MWs, the marginal cost reduction will likely be in the range of 20% to 25%.

These price trends will benefit the electricity sector in 2015, as lower fuel prices will reduce distribution companies' energy purchase bill, helping, in turn, to temporarily ease distribution companies' operational losses and the need for government transfers to cover the sector's deficit during the year. Fitch expects a 25% average reduction in the price of fuels in 2015 (assuming that electricity losses remain constant at 32%) will reduce electricity purchasing costs by 23.6% in 2015. This would allow distribution companies to post lower operational losses. We believe EBIT losses of USD520 million in 2015 are likely, though improved from 2014 losses of USD907 million.

Fitch believes the country's energy sector losses (32% as of December 2014) continue to be an important constraint to ensuring the electricity sector's financial sustainability. If such losses continue, they could negatively affect the sector's performance once oil prices recover.

The Dominican Republic power sector is characterized by low collections from end users and high electricity losses. Such conditions have undermined distribution companies' cash flow generation, leaving them dependent on government subsidies to honor their accounts payable to the Dominican generation companies. This links the credit quality of the distribution and generation companies in the country to that of the sovereign.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Julio Ugueto
Associate Director
Corporate Finance
+1 571 307-5180
Calle 69 A No. 9-85
Bogotá, Colombia
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Julio Ugueto
Associate Director
Corporate Finance
+1 571 307-5180
Calle 69 A No. 9-85
Bogotá, Colombia
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com