Fitch Affirms AES Andres's FC IDR at 'B+'; Outlook Positive
Fitch has withdrawn its ratings on AES Andres Dominicana SPV, as its debt was called last year and the entity is in the process of dissolution.
KEY RATING DRIVERS
AES Andres B. V.'s (Andres) 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).
The rating of the notes considers the combined operating assets of Andres and Dominican Power Partners (DPP), which jointly guarantee AES Andres's USD270 million notes due 2026. These notes are attached to Empresa Generadora de Electricidad Itabo's USD100 million notes, also rated 'B+'. The notes were primarily intended to repay a bridge taken to call similarly structured bonds last year. Additional funds will be used for small capex projects and to provide a working capital liquidity cushion. DPP currently contributes only about 10% of combined Andres/DPP EBITDA. 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 the Note guarantors.
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 (3.4% 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.
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
The combined credit metrics for Andres and DPP are strong for the rating category. For LTM as of 1Q16, companies' total gross leverage was 2.1x, while total net debt-to-EBITDA stood at 1.4x. EBITDA of USD151 million (compared to USD206 million in 2014) reflected major maintenance in the first half of 2015 (1H15) and lower gas prices. Fitch expects that leverage will deteriorate sharply this year reflecting the full drawdown on DPP's USD260 million credit facility and a USD100 million net debt increase from Andres's issuance in 2Q16. Additional stoppage time as DPP's combined cycle plant is brought online, as well as the effect of lower gas prices on PPA indexation will makes material EBITDA recovery in the medium term unlikely.
Cash Flow Volatility Persists
LTM Cash Flow from Operations (CFFO) for the two companies was USD138 million at 1Q16, compared to USD218 million at year-end 2015. Accounts receivable days increased slightly to 52 days from 49 days reflecting some lag from government transfers. Although these levels are much improved versus 2014 before the company executed its factoring agreement on receivables, some deterioration in working capital is in line with Fitch's medium expectations. Fitch's assumptions factor in a return to 100 day-level for accounts receivable over the next 12-18 months. Thereafter, it could increase, barring a factoring agreement similar to the one the company executed in 3Q15.
--Lower natural gas prices and revenues related to NG sales in the near term;
--Approximately 45 days of downtime at DPP in 2016 as the cycle is combined, with approximately 100 MW of additional capacity effective January 2017;
--100% of net income to be distributed as dividends annually, as well as the release of previously retained earnings in the form of capital reductions
A negative rating action to AES Andres 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. On the national scale, additional clarity about AES Andres's contractual position after the government's coal-fired plant comes online could lead to an upgrade.
Andres and DPP have historically reported very strong combined credit metrics for the rating category. Both companies have financial profiles characterized by low to moderate leverage and strong liquidity.
Combined LTM EBITDA as of 1Q16 totaled USD151 million (vs. USD 206 million at year-end 2014), with gross leverage of 2.1x and gross interest coverage of 9.6x. The companies' strong liquidity position is further supported by the 2026 bond, which extended most of their maturities by eight years. Currently, the company has a credit facility of 260m, of which approximately USD144 million had been drawn upon as of 1Q16. This loan is scheduled to begin amortizing in 4Q17 over nine equal quarterly payments. However, Fitch also expects this loan to be replaced by long-dated notes to be place in 4Q16.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
AES Andres B. V.
--Foreign Currency Issuer Default Rating (IDR) at 'B+';
--National Scale Long Term Rating at 'A+(dom)';
--Senior unsecured notes due 2026 at 'B+/RR4'.
The international scale Rating Outlooks is Positive. The national scale Outlook has been revised to Positive from Stable.
Fitch has withdrawn the following ratings:
AES Andres Dominicana SPV
--Long-Term Foreign Currency IDR;
--Senior unsecured notes due 2020.