S&p corporate credit rating 2012 12

Research Update:

Empresa Generadora de Electricidad Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance Primary Credit Analyst: Monica D Ponce, Mexico City (52) 55-5081-4454; monica_ponce@standardandpoors.com Secondary Credit Analyst: 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 Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance Overview • Empresa Generadora de Electricidad Haina S.A.'s (EGE Haina) business risk profile improved, as a result of increased diversification in the company's customer base and in its power generation.

• We are raising our corporate credit rating on EGE Haina to 'B' from 'B-'.

• The stable outlook reflects our expectation that EGE Haina will post satisfactory financial ratios and stronger cash flow generation.

• We expect EGE Haina to begin deleveraging in the second half of 2013 and continue in 2014, as its new plants become fully operational.

Rating Action On Dec. 27, 2012, Standard & Poor's Ratings Services raised its rating on Dominican Republic-based electric power generator Empresa Generadora de Electricidad Haina S.A. (Haina) to 'B' from 'B-'. The outlook remains stable.

The rating action reflects improvement in the company's operating and financial risk profiles, because it has diversified its customer base and energy sources.

Rationale Our ratings on EGE Haina and its special-purpose financing entity, Haina Finance S.A., consider the challenges of operating in the Dominican Republic's (B+/Stable/B) electric power industry, its weak regulatory framework, and an inefficient and highly subsidized distribution sector with uncertain long-term operational and financial sustainability. In particular, the cash flows of energy generating companies are susceptible to weak collection rates and payment delays from the distribution 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 ratings also incorporate our opinion that there is a low likelihood of timely and sufficient extraordinary support from the Dominican Republic to EGE Haina in the event of financial distress. In accordance with our criteria for government-related entities, we assess EGE Haina as having limited importance to the government's key economic and political objectives and a limited link to the government (given the latter's low level of involvement in the

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Research Update: Empresa Generadora de Electricidad Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance

company's strategy and day-to-day operations and its lack of controlling rights). The Haina Investment Co. (HIC; not rated) owns 50% of the company, and the Dominican government owns the remaining 50%.

We assess EGE Haina's stand-alone credit profile (SACP) at 'b', reflecting the challenges of operating in the Dominican Republic's heavily subsidized electricity sector, with uncertain (but improving) long-term operating and financial sustainability. 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. The SACP also considers the expected improvement in the company's key financial ratios, which has stemmed from higher average energy sales prices in 2012 amid greater energy demand, higher prices for Fuel Oil No. 6--the main driver of price escalations in EGE Haina's power purchase agreement (PPA) pricing formula--and higher power generation.

We assess EGE Haina's business risk profile as "vulnerable." In our view, the Dominican Republic's institutional and regulatory framework has improved during the past two years. We believe that allowances for tariff increases, improvements in invoicing systems, the distribution companies' ability to suspend service to debtors, and the strengthening of the managements of state-owned distribution companies have improved the sector's overall business environment. However, we think the sector continues to face several unresolved structural, technical, and institutional deficiencies. These include electricity theft (including technical losses), which represents approximately 35% of total electricity generated in the Dominican Republic; outdated equipment; dependence on fuel oil; and the distribution companies' failure to improve their overall operating and financial performance. The latter has made distribution companies dependent on the government's annual subsidy, which totaled about $1,300 million in 2012 and has been budgeted as $1,000 million for 2013. These unresolved issues--which continue to hinder the sector's performance, resulting in high operational and financial costs--continue to hinder our assessment of industry risk.

EGE Haina's ownership of 11 generation units at seven plants and its 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 those challenges. In particular, the company's contract with Consorcio Energetico Punta Cana-Macao (CEPM; 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.

Most of CEPM's clients are international hotel chains that pay directly to CEPM abroad; the number of days' sales outstanding is less than 30 for CEPM, reducing working capital requirements and reliance on the government's subsidy.

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 newly operational 25 MW wind farm--the first in the

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Research Update: Empresa Generadora de Electricidad Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance

country. Haina will expand its wind operating plant by 52 MW in the first month of 2013 and with Quisqueya II--a dual-fuel power plant currently under construction--when fully operational in 2014. We expect cash flow from operations and margins to continue to increase as a result of the additional flexibility in fuel use.

EGE Haina's performance for the 12 months ended Sept. 30, 2012, was in line with our expectations. The company's revenue growth was 15%, and its EBITDA was $129.5 million--which compared favorably with the $106.3 million posted for the same period of the prior year--benefiting from higher average energy sales prices and generation. This improvement was attributable to higher fuel oil prices and greater energy demand, stemming mainly from the reimplementation of the PPA with Empresa Distribuidora de Electricidad del Este S.A. and an increase in contracted capacity with CEPM to 64 MW. EGE Haina also benefited from increased generation, which reduced its need for energy purchases in the spot market, which benefits its margin. Moreover, margins from higher fuel prices have more than offset increased fuel expenses. As EGE Haina continues to expand its capacity in 2013-2014, we expect margins to increase due to lower energy purchases in the spot market to fulfill its long-term contracts. For the 12 months ended Sept. 30, 2012, EGE Haina's EBITDA margin was 19.8%, in line with the 18.6% posted in the same period of 2011.

We view EGE Haina's financial risk profile as "aggressive" (per our criteria), based on the company's limited (but improving) cash-flow generation and moderate leverage metrics. Historically, EGE Haina was highly leveraged, but debt leverage decreased as EBITDA generation rose. As of Sept. 30, 2012, EGE Haina posted debt to EBITDA and FFO to debt of 2.9x and 17.7%, respectively.

In March 2012, the company entered into a $200 million five-year senior secured loan with Citibank to fund the construction of an additional 52 MW of wind power and a 215 MW dual-fuel plant. We believe the company's debt to EBITDA ratio will reach its maximum of around 3.5x in 2013 and will begin to decrease as the investment in Los Cocos and in Quisqueya II generate benefits.

EGE Haina is the Dominican Republic's largest generator of electricity, based on installed and effective capacity. When the Los Cocos project became operational in mid-2011, EGE Haina increased its total installed capacity to 590 MW. EGE Haina's plants are located throughout the Dominican Republic, mainly on the southern coast of the island.

Liquidity We assess EGE Haina's liquidity as "adequate." As of Sept. 30, 2012, the company had about $240.6 million of cash on hand, which compared favorably with its debt maturities of $40 million in the next 12 months. We estimate that the sources vs. uses of cash ratio for 2013 will be 2.43x. Under our base-case scenario, we estimate that EGE Haina will use the remaining $19 million from its $200 million facility with Citibank in the first quarter of 2013 and will begin deleveraging starting in the second quarter of the year.

We expect cash flow from operations to improve in the fourth quarter of 2012 because of better working-capital management, but to remain negative for full

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Research Update: Empresa Generadora de Electricidad Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance

year 2012 due to high capital expenditures of $341.5 million. This amount includes development of Los Cocos II (the second phase of its wind farm project) and Quisqueya II, which we expect will be partially operational by the second half of 2013 and fully operational by first half 2014. Haina Finance is required to maintain, at all times, an amount on deposit in its interest reserve account (or letters of credit or certain temporary cash investments) equal to the interest payable on the bond on the immediately following interest payment date.

As of September 2012, EGE Haina was in compliance with the covenants on its notes stipulating an interest coverage ratio of no less than 2.5x and net debt to EBITDA of no more than 3.5x. Under our base-case scenario, EBITDA could drop by 38% and the company would continue in compliance with its covenants.

Outlook The stable outlook reflects our expectation that EGE Haina will maintain its current financial performance and liquidity throughout 2013 and improve in 2014. Our base-case scenario predicts an EBITDA margin of 19% and FFO to total debt of 24% for 2013. We expect these ratios to improve in 2014, as the new plants become fully operational. We could lower the ratings if the company's key credit metrics underperform our expectations, which could be the result of a more-aggressive financial policy toward the use of debt. The ratings could also come under pressure if the government fails to support the sector's development. The potential for an upgrade is limited by our assessment of industry risk.

Related Criteria And Research • Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 • Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 • Key Credit Factors: Business And Financial Risks In The Investor-Owned Utilities Industry, Nov. 26, 2008 • 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List Upgraded; Outlook Action To Empresa Generadora de Electricidad Haina S. A. Corporate Credit Rating B/Stable/--

From B-/Positive/--

Upgraded To

From

Haina Finance S.A.

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Research Update: Empresa Generadora de Electricidad Haina S. A. Credit Rating Raised To 'B' From ‘B-' On Improved Operating Performance

Senior Unsecured

B

B-

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