OREANDA-NEWS. Fitch Ratings expects to assign a 'B+/RR4' Long-Term rating to Empresa Generadora de Electricidad Itabo S.A.'s (Itabo) proposed issuance maturing in 2026. The notes would be attached to AES Andres B.V.'s notes, but would carry no cross guarantees.

KEY RATING DRIVERS

Itabo's ratings reflect the electricity sector's high dependency on transfers from the central government of the Dominican Republic 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 Power Purchase Agreements (PPAs), which contribute to strong cash flow generation and bolster liquidity.

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 robust energy demand growth (3.8% CAGR in 2009 - 2014). The regular delays in government transfers pressure the generators working capital needs and add volatility to their cash flows. This situation increases the risk for the sector, especially at a time of rising fiscal vulnerabilities affecting the central government's finances.

Working Capital Pressure & Lower Realized Prices

In 2015, Itabo generated USD114 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. 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.

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 a base load generator even after a 700 MW coal generation project, sponsored by the government, begins operating by 2017.

Adequate Credit Metrics

The company has strong credit metrics for the rating category. Year-end leverage, measured as total debt to EBITDA, improved to 1.0x at from 1.4x at December 2014, as debt decreased by almost USD50 million year-over-year. In the same period, EBITDA fell to USD69 million from USD81.5 million, while the EBITDA margin fell slightly to 34.6% from 36.9%. The decrease reflects lower coal prices, to which prices on contract sales are linked, and lower overall generation in the first half of 2015.

KEY ASSUMPTIONS

--No material unplanned stoppages in 2016; possibility of continued climatological impacts on an annual basis;
--Demand growth of approximately 2.5%;
--Fuel prices to remain low in the near- to medium-term, with possible impact on PPA renegotiations in 2016/2017.

RATING SENSITIVITIES

A negative rating action could occur if the DR'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.

LIQUIDITY

Itabo currently has an outstanding bridge loan of USD69 million due in 2017. This loan was part of a transaction in 2015 that was used to call the 2020 bonds of Itabo and AES Dominicana SPV. Itabo has proposed a new international bond, which would primarily be used to repay the bridge loan and extend its maturity profile. Excess funds would likely be used for minor capex and shoring up working capital needs. 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.