Fitch Affirms Itabo at 'B+'; Outlook Remains Positive
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, 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 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 a robust energy demand growth (3.8% CAGR in 2009 - 2015). 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.
Working Capital Pressure & Lower Realized Prices
As of LTM ending 1Q16, Itabo generated USD98 million of CFFO, compared to USD52 million at year-end 2014. In 3Q15, the company sold USD100 million of accounts receivable through factoring agreements, bringing receivable days down below one month. Fitch expects receivable days to gradually return to historical levels over the medium term. Moreoever, Itabo's PPA expires in the second half of 2016. The low price environment could expose the company to both spot sale vulnerability in the short term, and lower negotiated PPAs through the medium term. The company is currently preparing its bid for what Fitch expects to be between 200 and 210 MW of capacity contracts.
Low Cost Asset Portfolio
Itabo's ratings incorporate its strong competitive position as one of the lower 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, starts operations by 2017.
Adequate Credit Metrics
The company presents strong credit metrics for the rating category. LTM leverage as of 1Q16stood at 1.1x from 1.4x at December 2014, as debt decreased by almost USD50 million y-o-y. In the same period, EBITDA fell to USD64 million from USD82 million, while the EBITDA margin fell slightly to 33.7% from 36.9%. The decrease reflects lower coal prices, to which prices on contract sales are linked, and lower overall generation. In May 2016, the company issued USD99.9 million of debt to repay the outstanding bridge loan used to call the company's earlier bond due in 2020. Fitch expects continued softness in in EBITDA and the moderate debt increase to result in leverage of around 1.5x through the medium term.
--No material unplanned stoppages in 2016; possibility of continued climatological impacts on an annual basis;
--Demand growth of approximately 2%;
--Fuel prices to remain low in the near to medium term.
A negative rating action would follow if the Dominican Republic's sovereign ratings are downgraded, if there is sustained deterioration in the reliability of government transfers, and if financial performance deteriorates to the point of increasing the ratio of Debt-to-EBITDA to 4.5x for a sustained amount of time.
A positive rating action could follow if the Dominican Republic 's sovereign ratings are upgraded or if the electricity sector achieves financial sustainability through proper policy implementation.
As of 1Q16, the company had total debt of approximately USD70 million, roughly matching its 2015 LTM EBTIDA of 69 64 million. Fitch expects that lower coal prices (to which contract prices are indexed) coinciding with the expiration of its existing PPAs to limit medium term growth recovery prospects in Itabo's EBITDA. Gross leverage was 1.0x1x, an improvement from 1.4x in 2014 that reflects, reflecting Itabo's overall debt reduction from USD 114 million in 2014. In May 2016, the company issued attached 10-year notes with its sister companies AES Andres and DPP to repay existing debt and extend its maturity profile. The tranche assigned to Itabo totaled USD99.9 million. Fitch expects that lower coal prices (to which contract prices are indexed) coinciding with the expiration of its existing PPAs to limit medium term growth recovery prospects in Itabo's EBITDA.
The company currently holds approximately two thirds of its cash in USD, and maintains an undrawn USD45 million committed credit line with Scotiabank, maturing in 1Q17.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Empresa Generadora de Electricidad Itabo
--Foreign Currency Long-Term IDR at 'B+';
--Local Currency Long-Term IDR at 'B+';
--Senior unsecured notes due 2026 at 'B+/RR4'.
The Rating Outlook is Positive.
Fitch has withdrawn the following rating:
Itabo Dominicana SPV
--Senior unsecured notes due 2020.