May 29, 2009
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: Fabiola Ortiz, Mexico City (52) 55-5081-4449; fabiola_ortiz@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: • Position as the largest electricity generator in the Dominican Republic; • U.S. dollar-denominated, long-term agreements with distributors, mitigating foreign-exchange risk; • Operating efficiency of its plants; and • Smooth debt maturity schedule.
Corporate Credit Rating B-/Stable/--
Weaknesses: • Association with an inefficient and highly subsidized distribution sector, with uncertain long-term operational and financial sustainability; • Low average collections from distributors; • Weak regulatory framework in the Dominican Republic; and • The electric sector's dependence on a developing, externally affected Dominican economy.
Rationale Standard & Poor's Ratings Services' ratings on Empresa Generadora de Electricidad Haina S.A. (EGE Haina) reflect the company's weak financial performance and expected deterioration in its key financial measures as a result of increased accounts receivable from distribution companies, lower sales, and the use of additional debt to finance its negative discretionary cash flow. The ratings also reflect the challenges of operating in the Dominican Republic's electric industry, which has an inefficient and highly subsidized distribution sector with uncertain long-term operational and financial sustainability. The Dominican Republic also has a historically weak regulatory framework. The sector depends on a developing economy, which may suffer in an even more stressed economy. Partially mitigating these pressures are the company's position as the largest electricity generator in the Dominican Republic; long-term agreements with distributors; the U.S. dollar-denominated nature of these agreements, which mitigates foreign-exchange risk; the operating efficiency of its plants; and its smooth debt maturity schedule. EGE Haina is the Dominican Republic's largest electricity generator based on installed capacity and effective capacity. The operational efficiency of EGE Haina has permitted high plant availability, about 95%. The company faces high off-taker risk, as evidenced by the Dominican distribution companies' failure to fully meet their payment obligations to the generators during the country's last economic crisis. These payments depend largely on the Dominican government's subsidies to the distribution sector. In our opinion, the government subsidy will likely remain in place through 2009 because the recent drop in fuel prices will reduce the amount. Also, toward reestablishing the balance of payments between EGE Haina and its distributors, the government entered into an agreement by which it offered to pay off $77.0 million of the outstanding accounts receivable generated during 2008
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Empresa Generadora de Electricidad Haina, S. A.
through the exchange of sovereign bonds. Further, Empresa Distribuidora de Electricidad del Este (EDE Este) and EGE Haina signed a contract to suspend the power purchase agreement (PPA) between the parties until EDE Este pays its current outstanding electric bill in full. Under the agreement, EGE Haina will continue to receive the revenues of pledged customers and credit card receipts, totaling about $6.0 million per month; this will decrease the company's working capital needs for 2009. EGE Haina's diversified portfolio of 10-year energy sales contracts partially offsets the company's exposure to spot-market volatility. The agreements are denominated in U.S. dollars, mitigating foreign-exchange risk. EGE Haina's first-quarter 2009 EBITDA margin fell to 12.4%, on a decrease in the average energy sales price for the period and lower demand. We expect EGE Haina's EBITDA generation will remain constrained during the rest of the 2009 and into 2010; however, this could improve once EDE Este's PPA is back in place. Because of this and its additional indebtedness, EGE Haina's cash flow protection measures have weakened. For the 12 months ended March 31, 2009, its total debt-to-EBITDA ratio stood at 3.4x, but for the first quarter it reached only 6.8x. We expect this ratio to come in at 6.5x by year-end 2009, not in line with our original forecast of 2.3x.
Liquidity As of March 30, 2009, EGE Haina had $16.4 million in cash on hand and a six-month interest reserve fund of $8 million. These compare favorably with its $10.8 million in short-term debt maturities. Nonetheless, the increase in accounts receivable has hurt the company's 2008 and first-quarter 2009 free operating cash flow, and we expect its cash flow to be slightly negative for the rest of 2009; the issuer should be able to meet this obligation with its cash on hand. We anticipate no major capital expenditures during 2009, with no additional dividend payments.
Outlook The stable outlook reflects our expectation that EGE Haina's cash on hand, coupled with its efforts to reduce its working capital needs, will allow the company to meet its 2009 debt obligations, despite the company's weak financial performance. A positive rating action is possible if EGE Haina improves its operating margins, reduces its negative free operating cash flow, and decreases its debt-to-EBITDA ratio to less than 4.0x. On the other hand, higher debt as a result of weakness in the company's operating cash flow generation--particularly higher capital expenditures and dividend payments--could result in a negative rating action. The Dominican government's failure to support the sector's development could also pressure the rating downward. Table 1
Empresa Generadora de Electricidad Haina S.A.--Peer Comparison* Industry Sector: Electric Power Utilities --Fiscal year ended Dec. 31, 2008-Empresa Generadora de Electricidad Haina S.A. Rating as of May 28, 2009
B-/Stable/--
(Mil. $) Revenues
Empresa Generadora de Electricidad Itabo S.A. B/Stable/--
AES Dominicana Energia Finance S.A. B-Âś
460.6
251.8
357.8
Net income from cont. oper.
38.6
42.1
21.4
Funds from oper. (FFO)
66.7
66.0
64.3
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Table 1
Empresa Generadora de Electricidad Haina S.A.--Peer Comparison* (cont.) Capital expenditures
17.1
7.9
10.1
Debt
176.7
125.0
181.0
Equity
318.5
310.9
41.5
16.0
29.4
31.3
EBIT interest coverage (x)
3.0
4.1
2.0
EBITDA interest coverage (x)
3.1
4.3
2.4
Return on capital (%)
14.3
16.0
41.3
FFO/debt (%)
37.7
52.8
35.5
2.4
1.7
1.6
Adjusted ratios Oper. income (before D&A)/revenues (%)
Debt/EBITDA (x) *Fully adjusted. ÂśSenior unsecured debt rating only.
Table 2
Empresa Generadora de Electricidad Haina S.A.--Quarterly Data* Industry Sector: Electric Power Utilities March 2009 December 2008 September 2008
June 2008 March 2008
(Mil. $) Revenues
55.4
92.6
146.2
121.4
100.5
Net income from cont. oper.
(3.3)
(2.6)
19.4
10.7
11.0
Funds from oper. (FFO)
11.6
11.1
23.1
13.1
19.4
Capital expenditures
0.4
(1.5)
16.8
0.6
1.1
Cash and short-term investments
16.4
22.3
43.0
49.6
81.0
Debt
185.8
176.7
178.7
180.7
188.0
Equity
275.2
318.5
341.1
321.7
310.9
Debt and equity
461.0
495.2
519.8
502.4
498.9
Adjusted ratios EBIT interest coverage (x)
2.2
3.0
4.9
4.4
2.7
FFO interest coverage (x)
2.1
2.8
5.7
4.9
3.1
31.7
37.7
49.4
41.1
34.6
Discretionary cash flow/debt (%)
(35.1)
(17.8)
(3.4)
(8.9)
0.2
Net cash flow/capital expenditures (%)
115.5
273.0
496.1
2,693.9
3,046.0
40.3
35.7
34.4
36.0
37.7
8.3
12.5
20.0
18.4
12.9
FFO/debt (%)
Debt/debt + equity (%) Return on common equity (%) *Fully adjusted.
Ratings Detail (As Of May 29, 2009)* Empresa Generadora de Electricidad Haina, S. A. Corporate Credit Rating
B-/Stable/--
Senior Unsecured (1 Issue)
B-
Corporate Credit Ratings History 21-May-2009
B-/Stable/--
11-Apr-2007
B/Stable/--
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Empresa Generadora de Electricidad Haina, S. A.
Ratings Detail (As Of May 29, 2009)*(cont.) Business Risk Profile
Vulnerable
Financial Risk Profile
Highly leveraged
*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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