NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign Currency Issuer Default Rating (FC IDR) of AES Andres Dominicana SPV (AES Dominicana) and its USD284 million bond due 2020 at 'B+'. The 'RR4' Recovery Rating assigned to the 2020 notes reflects the recovery rating cap of companies domiciled in the Dominican Republic. Additionally, Fitch has assigned an FC IDR of 'B+' to AES Andres B.V (AES Andres), and affirmed its National Scale rating at 'A+(dom)'. The Rating Outlook on both IDRs is Stable.
KEY RATING DRIVERS
AES Dominicana and AES Andres's ratings reflect the Dominican Republic's (DR) electricity sector's high dependency on transfers from the central government to service their financial obligations, a condition that links the credit quality of the distribution companies 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. The ratings also consider the companies' solid asset portfolio, strong balance sheet, and well-structured purchase power agreements (PPAs).
AES Dominicana SPV represents the combined operating assets of AES Andres and Dominican Power Partners (DPP), which jointly guarantee AES Dominicana's USD166 million notes due 2020. These notes are attached to Itabo Dominicana SPV's USD116 million notes, also rated 'B+'. DPP currently contributes only about 10% of combined AES Dominicana EBITDA, further tying AES Dominicana's operational rating drivers to Andres. In 2017, DPP is expected to complete a significant capacity expansion in the form of conversion to a combined-cycle plant, substantially increasing its proportional revenue and EBITDA contribution to the combined results of AES Dominicana.
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 the country's exposure to fluctuations in fossil-fuel prices and energy demand growth (3.8% CAGR in 2009-2014). 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 Andres has the DR's 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. Moreover, AES Andres operates the country's sole LNG port, offering regasification, storage, and transportation infrastructure. In the medium term, the company is also looking to expand its transportation network and processing capacity for its LNG operations. By 2017, the aggregate capacity of AES Dominicana will increase by approximately 114MW as result of the development of a combined cycle facility in DPP's power plant. The construction of this project would start by the end of the year.
Strong Credit Metrics
AES Andres presents strong credit metrics for the rating category. At June 2015, total debt-to-LTM EBITDA was 1.1x, while total net debt-to-EBITDA stood at 0.7x as of 2Q15. Major maintenance in the first half of 2015 (1H15), and lower gas prices have pressured LTM EBITDA down to USD159 million in 2Q15 from USD187 million at year-end 2014. With the completion of major maintenance, Fitch expects moderate recovery in EBITDA at the Andres level in 2016.
For AES Dominicana, total debt-to-LTM EBITDA was 1.3x as of 2Q15, while total net debt-to-EBITDA stood at 0.7x, versus 0.7x leverage and 0.2x net leverage for the same period last year. The weaker leverage is primarily due to a USD260 million credit facility that is being gradually drawn upon for capex at DPP. The company expects to have fully drawn down the facility by the end of 2016. Combined results at AES Dominicana will likely remain low in 2016 reflecting downtimes for the closing of DPP's cycle and the effect of lower gas prices on PPA indexation.
Cash Flow Volatility Persists
The sector's collections deficit and delays in government transfers continue to pressure company cash flow. For the LTM June 2015, AES Dominicana generated USD136 million of cash flow from operations (CFFO), above the USD66 million posted in the same period last year. This increase is mainly explained by inflows from accounts receivables and inventory reduction. Weaker EBITDA of USD172 million (versus USD226 million last year) primarily reflects lower spot sale revenues at AES Andres and DPP, as well as longer than expected maintenance downtime at AES Andres.
RATING SENSITIVITIES
A negative rating action to AES Andres and/or AES Dominicana would follow if the DR's sovereign ratings are downgraded, if there is sustained deterioration in the reliability of government transfers, and financial performance deteriorates to the point of increasing the combined Andres/DPP ratio of debt-to-EBITDA to 4.5x for a sustained period.
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.
LIQUIDITY AND DEBT STRUCTURE
Higher Leverage in the Medium Term
As of June 30, 2015, AES Dominicana had cash and marketable security holdings of USD109 million. Fitch is expecting gross leverage to peak briefly at over 3.5x during the next 18 months, as project-related debt is fully recognized. Incremental EBITDA related to these projects should bring leverage quickly back down to the 2.5x level thereafter. Fitch further expects AES Dominicana to maintain or extend its healthy maturity profile.
KEY ASSUMPTIONS
--Major maintenance in 1Q15 at AES Andres
--Downtime of 45 days at DPP in 2016 as it converts to combined cycle with around 100MW of additional capacity effective January 2017
--Lower natural gas prices and revenues related to NG sales in the near term
--Lower energy prices tied to NG price effects on PPA indexation
--Higher volume sales of NG in the medium term.
FULL LIST OF RATING ACTIONS
AES Andres B.V.
--Foreign Currency Issuer Default Ratings (IDRs) assigned at 'B+';
--National Scale rating affirmed at 'A+(dom)'.
The Rating Outlook is Stable
AES Andres Dominicana SPV
--Foreign currency Issuer Default Ratings (IDRs) affirmed at 'B+'
--Senior unsecured notes rating affirmed at 'B+/RR4'.
The Rating Outlook is Stable
Date of Relevant Rating Committee: Sep. 18, 2015.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Country-Specific Treatment of Recovery Ratings (pub. 28 Jun 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710859
Additional Disclosures
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991079
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991079
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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