Research Update:
Empresa Generadora de Electricidad Itabo ‘B-’ Issuer Credit Rating Affirmed On Better Financial Performance Primary Credit Analyst: Monica D Ponce, Mexico City (52) 55-5081-4454; monica_ponce@standardandpoors.com Secondary Contact: Jose Coballasi, Mexico City (52) 55-5081-4414; jose_coballasi@standardandpoors.com
Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List
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Research Update:
Empresa Generadora de Electricidad Itabo ‘B-’ Issuer Credit Rating Affirmed On Better Financial Performance Overview • Empresa Generadora de Electricidad Itabo S.A.'s (Itabo) operating performance and cash flow generation improved significantly during 2012 from 2011, and the company returned to profitability. • We are affirming our 'B-' issuer credit rating on Itabo. • The stable outlook reflects our expectation that the company will maintain its improved profitability in 2013 and continue to post satisfactory financial ratios in 2013 and 2014.
Rating Action On Dec. 27, 2012, Standard & Poor's Ratings Services affirmed its 'B-' issuer credit rating on Dominican Republic-based electric power generator Empresa Generadora de Electricidad Itabo S.A. (Itabo). The outlook remains stable.
Rationale Our ratings on Itabo reflect the challenges of operating in the Dominican Republic's (B+/Stable/B) electric power industry, the country's weak regulatory framework, and an inefficient and highly subsidized distribution sector with uncertain long-term operational and financial sustainability. In particular, weak collection rates and payment delays from the distribution companies expose cash flow generation for energy generating companies. The rating also considers the power sector's dependence on the sovereign's ability to keep subsidizing the sector and the economy, which may be affected in an economic stress scenario. The rating incorporates our opinion that there is a low likelihood of timely and sufficient extraordinary support from the Dominican Republic (B+/Stable/B) to Itabo in the event of financial distress. In accordance with our criteria for government-related entities (GREs), our view reflects our assessment of Itabo's limited importance to the government's key economic and political objectives and its minority ownership of the company with no effective control rights. The AES Corp.'s (BB-/Stable/--) subsidiaries own 50% of the company, the Dominican government owns 49.97%, and former state employees own 0.03%. We assess Itabo's standalone credit profile (SACP) at 'b-', which reflects the challenges of operating in the Dominican Republic's heavily subsidized
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Research Update: Empresa Generadora de Electricidad Itabo ‘B-’ Issuer Credit Rating Affirmed On Better Financial Performance
electric sector with uncertain, albeit improving, long-term operational and financial sustainability. Also, the SACP incorporates the company's improved financial performance, partly a result of the higher-than-expected revenues from higher electricity generation and sales prices in 2012, improved bill collection rates, and lower capital expenditures. The SACP also incorporates the company's diversified portfolio of dollar-denominated long-term energy sales contracts and AES' 50% ownership, a competitive power plant operator with a strong management track record. We assess Itabo's business risk profile as "vulnerable." The Dominican Republic's institutional and regulatory framework has improved during the past two years. In our view, allowance for tariff increases, the improvements in invoicing systems, and the distribution companies' ability to suspend service to debtors have improved the overall business environment in the sector. However, we believe that it continues to face several unresolved structural, technical, and institutional deficiencies. These include electricity theft, outdated equipment, dependence on fuel oil, and the distribution companies' failure to improve their overall operating and financial performance leading to a high dependence on the government's annual subsidy, which totaled around $1,300 million during 2012 and has been budgeted as $800 for 2013. These unresolved issues continue to hinder the sector's performance--and our assessment of industry risk--resulting in high operational and financial costs. Itabo's ownership of one of the country's lowest-cost thermal power plants, with a competitive dispatch position among thermal generators, partly offsets these challenges. In addition, it benefits from a diversified portfolio of dollar-denominated, long-term energy sales contracts that limit its exposure to spot-market volatility and allow semiannual pass-through of fuel costs. We assess Itabo's financial risk profile as "aggressive", given the issuer's exposure to significant working swings that have led to volatility in its key financial indicators in the past. Itabo returned to profitability in 2012. For the 12 months ended Sept. 30, 2012, revenues increased 11.4%, compared with the same period of 2011. Net income was $10.8 million, a meaningful improvement compared with the net loss of $21 million the company registered for the same period a year before. The results are mainly from higher electricity sales due to an increase in prices, more energy sold, and the expiration of its fixed-price coal supply contract in mid-2011. Itabo has changed its coal procurement strategy toward the use of short-term supply contracts, which has helped pass on higher coal prices and increase its margin. EBITDA margin rose to 23.42% for the 12 months ended Sept. 30, 2012. In the 12 months ended Sept. 30, 2012, increased cash-flow generation improved the issuer's key financial ratios significantly (from higher revenues and the company's return to profitability). For the 12 months ended Sept. 30, 2012, Itabo posted a total debt to EBITDA ratio of 2.1x, funds from operations (FFO) to total debt of 41.8%, and EBITDA interest coverage ratio of 3.7x. Itabo Dominicana, a special-purpose financing entity, issued bonds, which have a guarantee from operating company Empresa Generadora de Energia Itabo. Itabo
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Research Update: Empresa Generadora de Electricidad Itabo ‘B-’ Issuer Credit Rating Affirmed On Better Financial Performance
owns and operates two thermal power generation units in the Dominican Republic, with an aggregate 260 megawatts (MW) of installed capacity, representing around 8% of the current total installed capacity in the country and around 13% of total generation in 2012.
Liquidity In our view, Itabo's liquidity is "adequate." Under our base case scenario, sources and uses ratio for 2013 will be around 2.0 times. As of Sept. 30, 2012, Itabo had $108.62 million in cash and short-term investments, including a six-month interest reserve fund, with no short-term debt outstanding. The maturity debt schedule is manageable, as the next debt payment is in 2013 for a bond issuance in the local market; we expect the company to pay it from its own cash flow. Itabo's free operating cash flow (FOCF) generation suffered from higher capital spending requirements during the first two quarters of 2012. FOCF returned to positive territory during the third quarter of 2012. We expect that during 2013 capital spending requirements will remain high, and that the company will finance its capital spending for the year mainly with its own operating cash flow. The company has available lines of credit for $25 million, which remain undrawn.
Outlook The stable outlook reflects our expectation that the company's shift in financial strategy toward the use of short-term fuel supply contracts will continue to improve overall profitability. Also, we expect the government to continue to support the electric sector through ongoing subsidies. Under our base-case scenario, we estimate that EBITDA to debt will be around 1.5x in 2013 and FFO to total debt will increase to 53% in 2013. We could take a positive rating action if the company is able to improve and maintain its overall profitability and financial performance amid prudent debt management throughout 2013. Conversely, we would lower the rating if debt metrics underperform our expectations and liquidity weakens.
Related Criteria And Research • Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 • Business Risk/Financial Risk Matrix Expanded, May 27, 2009 • 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List Ratings Affirmed Empresa Generadora de Electricidad Itabo S. A. ITABO DOMINICANA
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Research Update: Empresa Generadora de Electricidad Itabo ‘B-’ Issuer Credit Rating Affirmed On Better Financial Performance
Corporate Credit Rating ITABO DOMINICANA Senior Unsecured
B-/Stable/--
B-
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