AES Andres Dominicana ‘B’ Credit Rating Affirmed, Outlook Stable Primary Credit Analyst: Monica D Ponce, Mexico City (52) 55-5081-4454; email@example.com Secondary Contact: Jose Coballasi, Mexico City (52) 55-5081-4414; firstname.lastname@example.org
Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List
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AES Andres Dominicana ‘B’ Credit Rating Affirmed, Outlook Stable Overview • AES Andres Dominicana's financial performance was in line with our expectations in 2012. • We are affirming our 'B' issuer credit rating on the company. • The stable outlook reflects our expectation that AES Andres Dominicana will continue to generate satisfactory financial ratios and strong cash flows in 2013 and 2014.
Rating Action On Dec. 27, 2012, Standard & Poor's Ratings Services affirmed its 'B' issuer credit rating on Dominican Republic-based electric power generator AES Andres Dominicana. The outlook remains stable.
Rationale The rating on power generator AES Andres Dominicana reflects the challenges of operating in the Dominican Republic's (B+/Stable/B) electric power industry, the country's weak regulatory framework, and an inefficient and highly subsidized distribution sector with uncertain long-term operational and financial sustainability. In particular, the cash flow generation of energy generating companies is exposed to the 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. We assess AES Andres Dominicana's business risk profile as "vulnerable" (as our criteria define the term). In our view, allowances for tariff increases, the improvements in invoicing systems, the distribution companies' ability to suspend service to debtors, and the strengthening of the management of the state-owned distribution companies have improved the overall business environment for the nation's power generators. However, we believe the industry continues to face several unresolved structural, technical, and institutional deficiencies, such as electricity theft, outdated equipment, dependence on fuel oil, and distribution companies' failure to improve their overall operating and financial performance. These factors lead to the distribution companies' high dependence on government subsidies, which totaled about $1,300 million in 2012 and have been budgeted as $800 for 2013. These unresolved issues continue to hinder the sector's performance, resulting in high operational and financial costs, and remain critical in our assessment of
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Research Update: AES Andres Dominicana â€˜Bâ€™ Credit Rating Affirmed, Outlook Stable
industry risk. AES Andres Dominicana has diversified its dollar-denominated portfolio of long-term energy sales contracts, limiting its exposure to spot-market volatility and allowing the company to pass through higher fuel costs. The rating also considers AES Andres Dominicana's ownership of the Dominican Republic's only liquefied natural gas (LNG) terminal. This led to the development of the company's natural gas marketing business, which further diversified its customer base, and to its strategy of improving top-line growth through higher market penetration with unregulated customers. The company also benefits from its ownership by The AES Corp. (BB-/Stable/--), which provides it with technical, managerial, and operating expertise. We assess AES Andres Dominicana's financial risk profile as "aggressive", given the issuer's exposure to significant working capital swings that have led to volatility in its key financial indicators in the past. However, the company has been able to improve its financial profile through positive cash-flow generation, prudent debt management, and strong liquidity. For the 12 months ended Sept. 30, 2012, the company's revenues totaled $493.7 million, an increase of about 16.5% from the same period of 2011. The gain was attributable to higher LNG sales (due to greater volume and higher price), and higher revenue from pipeline fees to third parties. The EBITDA margin decreased to 27.6%, compared with 45.1% for the same period in 2011, as a result of higher LNG prices. For the 12 months ended Sept. 30, 2012, the company posted a total debt to EBITDA ratio of 1.2x and funds from operations to total debt of 48.9%. AES Andres Dominicana Ltd., a special-purpose financing entity, issued the bonds, which have a joint and several guarantee from operating companies AES Andres B.V. (not rated) and Dominican Power Partners (DPP; not rated). AES Andres B.V. has a 319-megawatt (MW) natural gas-fired combined cycle plant, and DPP has two natural gas-fired plants totaling 236 MW. Aggregate installed capacity of approximately 555 MW represents close to 17% of the current total installed capacity and around 25% of total generation in 2012 in the Dominican Republic.
Liquidity We view AES Andres Dominicana's liquidity as "strong." Under our base-case scenario, the ratio of sources to uses in 2013 should be 2.31x. As of Sept. 30, 2012, the company had about $137.4 million of cash and short-term investments, comparing favorably with annual interest payments of $16 million on the bonds, and there are no debt maturities during the next 12 months. A six-month interest reserve fund also supports the company's liquidity. Working-capital needs can be large, but the company has $15 million of standby letters of credit for LNG purchases and $27.5 million of lines of credit, which remain undrawn. AES Andres Dominicana's free operating cash flow for the 12 months ended Sept. 30, 2012, fell to $26.1 million, from $93.3 million in the same period of 2011, which reflected higher operating costs and expenses
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Research Update: AES Andres Dominicana ‘B’ Credit Rating Affirmed, Outlook Stable
during the period.
Outlook The stable outlook reflects our expectation that the company will continue to generate strong financial indicators and liquidity. We estimate, under our base-case scenario, that AES Andres Dominicana will post a 40% EBITDA margin for 2012 and 22% for 2013 and total debt to EBITDA of below 1x for 2012 and 1.5x for 2013. The potential for an upgrade is limited by our assessment of industry risk. This factor weighs heavily on the rating. In our view, the government's failure to provide requisite support to the electricity sector—and/or a deterioration of AES Andres Dominicana's financial performance and liquidity--could pressure the rating.
Related Criteria And Research • Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 • Key Credit Factors: Business And Financial Risks In The Investor-Owned Utilities Industry, Nov. 26, 2008
Ratings List Ratings Affirmed AES Andres Dominicana Corporate Credit Rating Senior Unsecured
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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