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.
Date of Relevant Rating Committee: April 21, 2016
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003661
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003661
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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