OREANDA-NEWS. Fitch Ratings expects to assign a long-term rating of 'B+/RR4' to AES Andres B.V.'s (Andres) proposed issuance maturing in 2026, a joint and several obligation of AES Andres and Dominican Power Partners. The new notes are attached to Empresa Generadora de Electricidad Itabo S.A.'s proposed issuance, but share no cross guarantees with them. The 'RR4' Recovery Rating reflects the recovery rating cap of companies domiciled in the Dominican Republic (DR).

KEY RATING DRIVERS

Andres's ratings reflect the DR's 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 and severally guarantee Andres's proposed notes due 2026. These notes will be attached to Empresa Generadora de Electricidad Itabo's notes, also expected to be rated 'B+'. The notes are primarily intended to repay a USD180 million bridge loan 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 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% compound annual growth rate [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

Andres has the DR's most efficient power plant, and ranks among the lowest-cost electricity generators in the country. Andres's 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, 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 the year ended the companies' total debt-to-EBITDA was 2.1x, while total net debt-to-EBITDA stood at 1.2x. Major maintenance in the first half of 2015 (1H15), and lower gas prices pressured EBITDA down to USD141 million versus USD206 million at year-end 2014. 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 proposed issuance. 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 keep EBITDA low until 2017.

Cash Flow Volatility Persists

In 2015, Andres and DPP generated USD218 million of cash flow from operations (CFFO), above the USD143 million posted in the same period last year. This cash inflow is due to the sale of USD142 million of accounts receivables through a factoring agreement in the third quarter of 2015 (3Q15), which reduced receivable days to less than a month. However, Fitch expects the sector's collections deficit and delays in government transfers to gradually accumulate again, driving Andres/DPP's receivable days to return to above 100 over the next 18-24 months.

KEY ASSUMPTIONS

--Lower natural gas prices and revenues related to NG sales in the near term;
--Suspension of NG expansion plans;
--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.

RATING SENSITIVITIES
A negative rating action to AES Andres B.V. 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
2015 EBITDA totalled USD141 million (versus USD206 million at year-end 2014), with gross leverage of 2.1x and gross interest coverage of 7.2x. The companies' strong liquidity position would be further supported by the proposed 2026 bond, which would extend most of their maturities by eight years. Currently, the company has a credit facility of USD260 million, of which approximately USD112 million had been drawn upon as of year-end. 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 before it begins to amortize. Additionally, DPP and Andres have committed credit lines of USD70 million with Scotiabank, of which USD42.5 million remain undrawn. These lines mature in 1Q15.