Fitch Affirms Itabo's IDR at 'B'; Outlook Stable
CHICAGO & CARACAS, Venezuela -- January 18, 2013
Fitch Ratings has affirmed Itabo Dominicana SPV's (ITABO) Foreign Currency and
Local Currency IDRs at 'B' with a Stable Outlook. A full list of rating
actions follows at the end of this release.
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 in the country to that of the sovereign. Low collections
from end-users and high electricity losses 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.
Fitch expects the continuation of recent policy changes to allow EDEs to reach
breakeven cash flow generation in the medium-term. Yet, the expiration of the
stand-by arrangement (SBA) with the International Monetary Fund (IMF) on Feb.
28, 2012 holds the potential to derail the modest progress achieved by the
sector so far. 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.
The electricity sector registered energy losses of 31.9% and an average
collection rate of 89.8% both by October 2012, rendering the cash generation
capacity of the distribution companies very weak as evidenced by a Cash
Recovery Index of 61.2%, still below the target established in conjunction
with the IMF of 70%. This situation reinforces the sector's dependency on
public transfers and makes it a high risk sector, especially at a time of
rising fiscal vulnerabilities affecting the Central Government's finances (see
Fitch, Dec. 11th, 2012).
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 and sells electricity to three distribution companies in the
country through well-structured long term U.S. dollar denominated PPAs.
The company continued to post increasing EBITDA generation during the LTM
period ended September 2012. EBITDA increased to USD 60 million by the end of
third quarter 2012 from USD 27 million in FY2011. The operational
profitability's recovery follows the implementation of its coal purchasing
strategy that leverages the support of the AES Corp. to optimize contractual
terms and ensure increasing operational returns. Given the current trend in
coal prices, Fitch expects the company to continue strengthening its operation
and financial results based on the support strategy commented above.
This positive EBITDA evolution translated into adequate credit metrics as
evidenced by net leverage and coverage indicators with respect to EBITDA of
0.3x and 2.3x respectively by September 2012. Fitch expects the coverage ratio
to continue improving as the company succeeds in its cost optimization
strategy aimed at reducing average coal prices and, consequently, generation
For the LTM September 2012, ITABO generated USD100 million of CFFO, above the
USD14 million posted in FY2011. This result is explained not only by the
recuperation of operational results but also by the recent payment received
from the government in September 2012 to pay down account receivable arrears
which, in turn, reduced ITABO's Days of Sale to approximately 72 days. The
government had to finance this payment with a local bond placement given its
current fiscal vulnerabilities and weak cash generation capacity affecting the
sector. Fitch expects the continuation of arrears accumulation to add further
volatility to ITABO's cash flow generation in the future.
The company's debt structure is quite manageable with a seven year average
life which properly contributes to the reduction of liquidity risk. As of Sep.
30, 2012, ITABO's cash and marketable security holdings stood at of USD109
million providing ample liquidity cushion to meet operational and financial
Fitch affirms ITABO's ratings as follows:
--ITABO Dominicana SPV's FC IDR at 'B'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's FC and LC IDRs at 'B'; Stable
--ITABO Dominicana SPV's bond issuance maturing in 2020 at 'B/RR4';
--Empresa Generadora de Electricidad ITABO's National Long-Term issuer Rating
at 'A-(dom)'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's local bond rating at 'A-(dom)'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug 08, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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Lucas Aristizabal, +1-312-368-3260
70 West Madison Street
Chicago, IL 60602
Julio Ugueto, +1-58212-286-3232
Edf. Mene Grande II, #23
Av. Francisco de Miranda
Glaucia Calp, +57 1 326 9999
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