Fitch Ratings expects to assign a long-term rating of 'B-/RR4' to AES Andres Dominicana SPV's proposed issuance maturing in 2020. The new notes are attached to Itabo Dominicana SPV million proposed issuance. Concurrently, Fitch has affirmed AES Andres B.V. national scale rating at 'BBB(dom)'. The Rating Outlook is Stable.
AES Andres Dominicana will take the place of AES Dominicana Energia Finance, S.A. as the SPV used to issue AES Andres B.V. and Dominican Power Partners, LDC (DPP) guaranteed notes. AES Andres Dominicana's notes are jointly and severally guaranteed by the company's two operating companies, AES Andres B.V. and DPP. The 'RR4' Recovery Rating reflects the recovery rating cap of companies domiciled in the Dominican Republic.
AES Andres Dominicana's ratings reflect the operating companies' dependence on government subsidies for their financial sustainability. Notwithstanding recent improvements in the timeliness of government payments, the risks of operating electric generation assets in the Dominican Republic remain high and reflect the distribution companies' low collections and high losses. These risks translate into high cash flow volatility for all generation companies.
The sector trends are favorable mostly as a result of the Dominican Republic's new stand-by arrangement with the International Monetary Fund (IMF). As part of this stand-by arrangement, the government is committed to implement structural reforms in the electricity sector that should ensure its self sustainability and lower the sector's dependence on government transfers. The most relevant change for the country's electricity generators was the government's commitment to remain current with its payments to these companies.
Ratings Constrained by Credit Quality of the Government; Framework:
The Dominican Republic's power sector is characterized by low collections from end users and high electricity losses. Such conditions have kept distribution companies from effectively transferring cash to the country's generation companies and the government subsidies have covered this gap during recent years. This links the credit quality of the distribution and generation companies in the country to that of the sovereign.
Over the past five years, distribution companies' gross margin (losses) has amounted to a negative US$1.76 billion (or US$350 million on average per year). Total government transfers to the sector have been significantly higher than this given that distribution companies have not generated any positive cash flow from operation since before 2005. Although above historical levels, distribution companies' cash recovery index (CRI) continues to be low at approximately 68.5%, on average, for the first quarter of 2010. This means that of all the electricity that goes in to the national grid, only 68.5% is paid for and the balance disappears as theft, nonpayment, free electricity and technical losses.
IMF Agreement Positive for Generators:
The agreement signed with the IMF seeks to gradually eliminate the tariff deficit; increase the cash recovery index (CRI) to 70%, from the historical 50%, by incorporating approximately 600,000 non-paying users into paying and metered users; and eliminating free electricity (PRA) zones. The agreement should also result in focused subsidies and the creation of a central account to pay all generation companies.
Under terms of the agreement, electricity generators should now be paid by the government within 45 days. This compares with an average of approximately 170 to 200 days during the past few years. The new management team of the distribution companies has adhered to the recently revised electricity law and has also implemented loss reduction programs such as the zero debt zero theft initiative.
Strong Credit Protection Measures:
AES Andres Dominicana (i.e. the consolidation of AES Andres and DDP) has a strong standalone credit profile for the rating category. The company generated approximately US$143 million of EBITDA during the latest 12 months (LTM) ended June 30, 2010. AES Andres Dominicana's cash flow measures have also improved. For the LTM ended June 30, 2010, the company reported funds from operation (FFO) and cash flow from operations (CFO) of approximately US$26 million and US$49 million, respectively. The company can meet its annual debt service of approximately US$18 million with CFO or by using some of its US$105 million cash holdings. Pro-forma leverage with the proposed debt issuance is estimated to be approximately 1.2x.
Solid Assets Portfolio:
Andres and DPP enjoy a competitive advantage due to their favorable power purchase agreements (PPAs) and the use of liquefied natural gas (LNG), as the company controls the only LNG import terminal in the Dominican Republic. Andres is the newest and most efficient power plant in the country 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 LNG price is not more than 15% higher than the price of imported fuel oil No. 6. AES Dominicana generates a significant portion of its combined operating margin from indirectly servicing DPP's PPA with AES Andres, which is a more efficient plant.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Fitch's Approach to Rating Competitive Generators' (July 24, 2007);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009);
--'Country-Specific Treatment of Recovery Ratings - Revised' (Aug. 21, 2006).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
Country-Specific Treatment of Recovery Ratings - Revised
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=286306
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Fitch's Approach to Rating Competitive Generators
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=333818
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