May 19, 2008
Empresa Generadora de Electricidad Haina S. A. Primary Credit Analyst: Marcela Duenas, Mexico City (52) 55-5081-4437; marcela_duenas@standardandpoors.com Secondary Credit Analyst: Monica Ponce, Mexico City (52) 55-5081-4454; monica_ponce@standardandpoors.com
Table Of Contents Major Rating Factors Rationale Outlook
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Empresa Generadora de Electricidad Haina S. A. Major Rating Factors Strengths: • Largest electricity generator in the Dominican Republic • Power-purchase agreements with distribution companies are denominated in U.S. dollars and have 10 years to maturity • Operating efficiency of its plants with an availability of 97% • Smooth debt maturity schedule after debt restructuring
Corporate Credit Rating B/Stable/--
Weaknesses: • • • •
Inefficient and highly subsidized distribution sector Uncertainty about distribution sector's long-term operational and financial sustainability Weak regulatory framework in the Dominican Republic Electric sector depends on a developing Dominican economy that may be affected by external shocks
Rationale Standard & Poor's Ratings Services' ratings on Empresa Generadora de Electricidad Haina S.A. (EGE Haina) reflect the challenges of operating in the Dominican Republic's electric industry, which is characterized by an inefficient and highly subsidized distribution sector whose long-term operational and financial sustainability is highly uncertain. The rating also incorporates EGE Haina's high off-taker risk, evidenced by Dominican distribution companies' failure to fully meet their payment obligations to the generators during the country's latest economic crisis. Furthermore, the payment obligations from the distributors to Haina depend largely on the subsidy that the government grants to the distribution companies. The subsidy has been growing substantially, and we expect this trend to continue as fuel price continue to increase. In our opinion, the subsidy will remain in place for 2008, increasing the government's deficit. The rating considers the historically weak regulatory framework in the Dominican Republic. Finally, the rating takes into account the sector's dependence on a developing economy, which may be affected in an economic stress scenario. These challenges are partially offset by a diversified portfolio of U.S. dollar-denominated, long-term energy sales contracts that limit the company's exposure to spot-market volatility, as well as the efficiency of the company's plants, which have 97% availability as of Dec. 31, 2007. EGE Haina is the largest electricity generator in the Dominican Republic, based on installed capacity and effective capacity, and currently operates 11 generation units at six plants. The company's 599 MW of installed capacity consists of a coal-fired, steam-turbine generation unit, six fuel oil-fired, one steam-turbine generation unit, three diesel generation units, and one gas-turbine generation unit. The Haina Investment Co. (HIC; not rated) owns 50% of the company; the Dominican government owns the other 50%.
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Haina Finance is a special-purpose financing entity that issued the bonds and lent the funds to EGE Haina to repay outstanding debt obligations and for corporate purposes. The notes are structured as a 10-year bullet maturity, and EGE Haina supports them. Security consists of the issuer's shares and a debt-service reserve account. EGE Haina's EBITDA interest coverage ratio improved slightly to 4.7x for 2007 from 4.5x for 2006. The total debt-to-EBITDA ratio increased to 2.5x from 1.7x for the same period, and the funds from operations (FFO)-to-total debt ratio decreased to 31.9% in 2007 from 44.7% in 2006, due to the issuance of the $175 million senior notes. We expect the total debt-to-EBITDA and FFO-to-total debt ratios to remain in the range of 2.5x-3.0x and 25%-30%, respectively, in the 2008-2010 period. As of Dec. 31, 2007, the company's EBITDA margin was 21.9%, which is line with 20.2% in 2006. However, due to the anticipated increase in fuel oil prices in 2008, we expect the margins to dip below 20%.
Liquidity As of Dec. 31, 2007, Haina had $67 million in cash on hand and a six-month interest reserve fund of $8 million, which compares favorably with $16 million in short-term debt maturities. However, during 2007, Haina did not generate free operating cash flow due to an increase in working capital expenses resulting from higher-than-expected accounts receivable. We expect the company to generate free operating cash flow in 2008 due to lower working capital requirements and minimal 2008 capital expenditures.
Outlook The stable outlook reflects our expectation that EGE Haina will continue to post satisfactory financial indicators. The ratings could be lowered if the government is not able to sustain the increasing subsidies granted to the distribution companies. This could significantly deteriorate the company's operating margins, reduce cash flow generation, and increase off-taker risk. Also, the government's failure to support the sector's development could negatively affect the ratings. Table 1
Peer Comparison* Industry Sector: Electric Utility
Rating as of May 9, 2008
Empresa Generadora de Empresa Generadora de AES Dominicana AES CHIVOR & CIA Electricidad Itabo, S.A. Electricidad Haina, S.A. Energia Finance S.A. S.C.A. E.S.P. B/Stable/-B/Stable/-B-/Stable/-BB/Positive/---Average of past three fiscal years--
(Mil. $) Revenues
188.0
301.6
232.9
175.1
EBITDA
35.8
62.2
56.4
88.8
Net income from cont. oper.
27.6
23.8
(9.8)
51.5
Funds from operations (FFO)
48.3
41.2
45.5
54.9
Cash flow from operations
37.2
8.6
13.8
54.8
9.7
0.6
7.1
2.0
32.0
26.5
37.1
41.7
95.1
136.9
163.8
241.2
317.3
267.8
(16.1)
416.6
Capital expenditures Free operating cash flow Cash and investments Debt
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Empresa Generadora de Electricidad Haina S. A.
Table 1
Peer Comparison*(cont.) Equity Adjusted ratios
19.1
20.6
24.2
50.7
Oper. Income (bef. D&A)/revenues (%)
3.2
2.1
0.9
3.2
EBIT interest coverage (x)
3.6
3.4
1.3
3.9
EBITDA interest coverage (x)
7.6
9.8
27.7
11.1
Return on capital (%)
50.8
30.1
27.8
22.8
FFO/debt (%)
50.8
30.1
27.8
22.8
2.7
2.2
2.9
2.7
23.1
33.8
110.9
36.7
Debt/EBITDA (x) Debt/total capital (%) *Fully adjusted.
Table 2
Financial Summary* Industry Sector: Electric Utility --Fiscal year ended Dec. 31--
Rating history
2007 B/Stable/--
2006 NR
2005 NR
250.7 176.3 232.1
(Mil. $) Revenues
2004 NR
2003 NR
344.5
309.6
Net income from continuing operations
36.9
22.3
12.1 (33.6)
(8.4)
Funds from operations (FFO)
60.9
47.9
15.0
(3.8)
11.9
Capital expenditures Cash and short-term investments Debt Preferred stock
1.0
1.0
(0.1)
(0.8)
17.8
67.1
7.4
4.9
0.4
3.1
190.7
107.0
113.1 131.8 154.4
0.0
0.0
Equity
299.1
263.3
241.0 228.9 262.6
Debt and equity
489.7
370.3
354.1 360.8 417.0
2.8
2.8
Adjusted ratios EBIT interest coverage (x) FFO int. cov. (x)
0.0
0.0
1.0
0.3
1.0
3.4
3.0
0.7
(0.1)
0.5
31.9
44.7
13.3
(2.9)
7.7
0.0
9.1
12.7
21.5
(2.2)
6,076.0 4,800.7 (10,040.6) 485.3
39.2
FFO/debt (%) Discretionary cash flow/debt (%) Net cash flow/capital expenditures (%)
0.0
Debt/debt and equity (%)
38.9
28.9
Return on common equity (%)
13.1 0.0
Common dividend payout ratio (unadjusted) (%)
31.9
36.5
37.0
8.9
5.1 (13.7)
(3.1)
0.0
0.0
0.0
0.0
*Fully adjusted. NR-Not rated.
Ratings Detail (As Of May 19, 2008)* Empresa Generadora de Electricidad Haina, S. A. Corporate Credit Rating
B/Stable/--
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Ratings Detail (As Of May 19, 2008)*(cont.) Senior Unsecured Foreign Currency
B
Corporate Credit Ratings History 11-Apr-2007
B/Stable/--
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
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