Research Update:
Empresa Generadora de Electricidad Haina Upgraded To 'B+' From 'B' On Improved Financial Performance; Outlook Stable Primary Credit Analyst: Stephanie Alles, Mexico City 52 55 5081 4416; stephanie.alles@standardandpoors.com Secondary Contact: Maria del Sol S Gonzalez, CFA, New York (1) 212-438-4443; maria.gonzalezcosio@standardandpoors.com
Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List
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Research Update:
Empresa Generadora de Electricidad Haina Upgraded To 'B+' From 'B' On Improved Financial Performance; Outlook Stable Overview • Dominican Republic-based power generator, EGE Haina, has improved its credit metrics beyond our expectations, due to its increased and more efficient installed capacity. • We are raising our corporate credit rating on EGE Haina to 'B+' from 'B'. • The stable outlook reflects our expectation that EGE Haina will continue to post sound financial ratios, that its capital expenditures (capex) plan won't boost its debt to EBITDA to more than 3.0x, and that it will successfully manage swings in working capital costs by effectively collecting past due invoices.
Rating Action On Nov. 7, 2014, Standard & Poor's Ratings Services upgraded Empresa Generadora de Electricidad Haina S.A. (EGE Haina) to 'B+' from 'B'. The outlook remains stable.
Rationale EGE Haina has improved its key financial ratios beyond our expectations, following a higher EBITDA margin due to greater power generation at its new, more efficient plants and successful cost management, which is reflected in lower cost as a percentage of revenues. For the last twelve months ended June 30, 2014, the company posted an EBITDA margin of 27% compared with 19% for the same period a year before. We asses EGE Haina's financial risk profile as "aggressive" (as per our criteria), based on the company's improved cash-flow generation and lower leverage metrics. Additionally, its financial risk profile also reflects the company's exposure to working capital swings due to significant collection delays, which results in a highly volatile cash-flow from operations generation. The company reduced its net debt-to-EBITDA ratio in 2014 as the investment in Los Cocos and Quisqueya II began generating earnings in January 2013 and September 2013, respectively. For the last twelve months ended June 30, 2014, EGE Haina posted net debt to EBITDA of 1.7x and funds from operations (FFO) to debt of 59%. Nevertheless, as of Oct. 31, 2014, the company had about 5.5 months of accounts receivables from the distribution companies. We assess EGE Haina's stand-alone credit profile (SACP) at 'b+', reflecting
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Research Update: Empresa Generadora de Electricidad Haina Upgraded To 'B+' From 'B' On Improved Financial Performance; Outlook Stable
its "weak" business risk profile given the challenges of operating in the Dominican Republic's (DR; B+/Stable/B) heavily subsidized electricity sector, its weak regulatory framework, and uncertain long-term operating and financial sustainability. In particular, DR-based power generators' cash flows are susceptible to weak collection rates and payment delays from the distribution companies. The rating also considers the power sector's dependence on the economy and the sovereign's ability to continue subsidizing the sector, which may weaken in an economic stress scenario. The SACP incorporates the company's diversified portfolio of dollar-denominated, long-term energy sales contracts and its position as the country's largest electricity generator. EGE Haina's diversified portfolio of dollar-denominated, long-term energy sales contracts (which limit its exposure to spot-market volatility and allow a pass-through of fuel costs) partially offset these challenges. The company's contract with Consorcio Energetico Punta Cana-Macao (not rated) for up to 100 megawatts (MW) diversifies its client base and reduces its exposure to distribution companies that are heavily reliant on the government's subsidy. The company's power purchase agreements (PPAs) with the distributions companies in the DR will expire in mid-2016. Although the company has not yet renewed its PPA contracts, our base-case scenario considers that the government will likely auction new PPAs to replace the ones that expire. We believe the prices in the new PPAs will be lower than those of current PPAs because electricity supply is more efficient than in the past. Given a stress scenario where the company fails to sign new PPAs and limits its activities to the sale of all of its electricity output in the spot market, we would expect EGE Haina's EBITDA generation to weaken as of mid-2016 by about $45 million and its EBITDA margin to decline about 20%. We believe this scenario is unlikely and its impact on the financial risk profile of the company would be limited. The company's generation units consist of a coal-fired steam turbine generating plant, four oil-fired steam generation units, two fuel oil-fired diesel engine generation plants, one gas turbine generation unit (fired with diesel fuel), and a 77 MW wind farm. EGE Haina recently expanded its wind operating plant and its dual-fuel power plant, which were fully operational in 2014. We expect cash flow from operations and margins to continue to increase as a result of this additional capacity and due to the flexibility in fuel use. The company plans to keep increasing its capex program by expanding its asset portfolio. EGE Haina plans to invest in the expansion of its current assets by adding 50 MW to its wind farm Los Cocos in the next three years. This additional installed capacity will partially mitigate the effect of the PPA contracts that expire in 2016. The ratings also incorporate our opinion that there is a "low" likelihood of timely and sufficient extraordinary support from the DR in the event of financial distress.
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Research Update: Empresa Generadora de Electricidad Haina Upgraded To 'B+' From 'B' On Improved Financial Performance; Outlook Stable
Liquidity We assess EGE Haina's liquidity as "less than adequate." The company's sources cover its uses by at least 1.0x in the next 12 months, which offers minimal protection against unexpected adverse developments. As of June 30, 2014, EGE Haina was in compliance with the covenants on its notes stipulating a minimum debt service coverage ratio of 1.3x and a net debt to EBITDA no greater than 3.5x. Principal Liquidity Sources • As of June 30, 2014, the company had about $71 million in cash on hand; • FFO generation of about $160 million in 2014; and • Local market bond issuance of $100 million in 2014. Principal Liquidity Uses • Debt maturities of $98 million as of June 30, 2014, • Capex of $40 million for 2014; and • Cash dividends of about $13 million in 2014.
Outlook The stable outlook on EGE Haina reflects our expectation that its financial performance will improve in 2014 and 2015 as the new plants become fully operational. Our base-case scenario expects an EBITDA margin of around 28% and total net debt to EBITDA less than 2.0 x for the next two years. Although the company faces uncertainty regarding the maturity of its PPA contracts with the distribution companies, we believe that even if the company limits its activities to selling on the spot market, its business risk profile would remain unchanged. We could lower the ratings if the company's key credit metrics fall short of our expectations significantly, which would follow sustained periods of downtime. Additionally, an increase in working capital needs due to higher accounts receivables which significantly weakens the company's liquidity could trigger a downgrade. The ratings could also come under pressure if the government fails to support the sector's development or if we downgraded the sovereign. The potential for an upgrade is limited by our assessment of industry risk for power generators in the DR as well as the rating on the country.
Ratings Score Snapshot Ratings Score Snapshot Corporate Credit Rating B+/Stable/--
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Research Update: Empresa Generadora de Electricidad Haina Upgraded To 'B+' From 'B' On Improved Financial Performance; Outlook Stable
Business risk: Weak • Country risk: High • Industry risk: Moderately high • Competitive position: Weak Financial risk: Aggressive • Cash flow/Leverage: Aggressive Anchor: b+ Modifiers • Diversification/Portfolio effect: Neutral (no impact) • Capital structure: Neutral (no impact) • Financial policy: Neutral (no impact) • Liquidity: Less than Adequate (no impact) • Management and governance: Fair (no impact) • Comparable rating analysis: Neutral (no impact) Stand-alone credit profile: b+ • Related government rating: B+ • Likelihood of government support: Low (no impact)
Related Criteria And Research Related Criteria • Criteria - Corporates - Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014 • Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 • Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 • Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 • General Criteria: Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
Ratings List Upgraded To Empresa Generadora de Electricidad Haina S. A. Corporate Credit Rating B+/Stable/--
From B/Stable/--
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