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Fitch Affirms EGE Haina's IDRs at 'B-'; Outlook Stable
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30 Jul 2010 4:04 PM (EDT) Fitch Ratings-Chicago-30 July 2010: Fitch Ratings has affirmed the following ratings of Empresa Generadora de Electricidad Haina, S.A. (EGE Haina); --International foreign currency Issuer Default Ratings (IDRs) at 'B-'; --International local currency IDR at 'B-'; --US$175 million senior unsecured notes due 2017 at 'B-/RR4'; --National long-term IDR at 'BBB(dom)'; --US$30 million local senior unsecured issuance program at 'BBB(dom)'. The Rating Outlook is Stable for all ratings except the National long-term IDR. EGE Haina's ratings reflect the company's dependence on government subsidies for its financial sustainability. Notwithstanding recent improvements in the timeliness of government payments, the risks of operating electric generation assets in the Dominican Republic remain high and reflect the distribution companies' low collections and high losses. These risks translate into high cash flow volatility for all generation companies. The sector trends are favorable mostly as a result of the Dominican Republic's new stand-by arrangement with the International Monetary Fund (IMF). As part of this stand-by arrangement, the government committed to implement structural reforms in the electricity sector that should ensure its self sustainability and lower the sector's dependence on government transfers. The most relevant change for the country's electricity generators was the government's commitment to remain current with its payments to these companies. Ratings Constrained by Credit Quality of the Government; Framework: The Dominican Republic power sector is characterized by low collections from end users and high electricity losses. Such conditions have kept distribution companies from effectively transferring cash to the country's generation companies and the government subsidies have covered this gap during recent years. This links the credit quality of the distribution and generation companies in the country to that of the sovereign. Over the past five years, distribution companies' gross margin (losses) has amounted to a negative US$1.76 billion (or US$350 million on average per year). Total government transfers to the sector have been significantly higher than this given that distribution companies have not generated any positive cash flow from operation since before 2005. Although above historical levels, distribution companies' cash recovery index (CRI) continues to be low at approximately 68.5%, on average, for the first quarter of 2010. This means that of all the electricity that goes in to the national grid, only 68.5% is paid for and the balance disappears as theft, nonpayment, free electricity and technical losses. IMF Agreement Positive for Generators: The agreement signed with the IMF seeks to gradually eliminate the tariff deficit; increase the cash recovery index (CRI) to 70%, from the historical 50%, by incorporating approximately 600,000 non-paying users into paying and metered users; and eliminate free electricity (PRA) zones. The agreement should also result in focused subsidies and the creation of a central account to pay all generation companies. Under terms of the agreement, electricity generators should now be paid by the government within 45 days. This compares with an average of approximately 170 to 200 days during the past few years. The new management team of the distribution companies has adhered to the recently revised electricity law and has also implemented loss reduction programs such as the zero debt zero theft initiative. Adequate Credit Protection Measures: EGE Haina's credit metrics are currently adequate for the rating category and had been weakening during the past year and a half due to the fall of hydrocarbon prices. For the last 12 months (LTM) ended March 31, 2010 and year end 2009, the company reported EBITDA of US$57 million and US$45 million, respectively, down from US$74 million reported during 2008. However, cash flow from operations (CFO) has seen a positive trend as a result of the company's commercial strategy to recover account receivables and the improved payment track record of distribution companies. For the LTM ended March 31, 2010 the company
09/22/2010 06:00 p.m.