Research Update: Empresa Generadora de Electricidad Itabo S. A. 'BB-' Ratings Affirmed, Outlook Remains Stable Primary Credit Analyst: Stephanie Alles, Mexico City (52) 55-5081-4416; stephanie.alles@spglobal.com Secondary Contact: Cecilia L Fullone, Buenos Aires (54) 114-891-2170; cecilia.fullone@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 1
Research Update: Empresa Generadora de Electricidad Itabo S. A. 'BB-' Ratings Affirmed, Outlook Remains Stable Overview The Dominican Republic-based power generator, Itabo, should maintain its cost efficient position and current conservative leverage. We're affirming our ratings on Itabo at 'BB-' because the sovereign rating continues to limit the ratings on Itabo. We're also maintaining Itabo's stand-alone credit profile (SACP) at 'bb'. The stable outlook on Itabo reflects that on the Dominican Republic. Rating Action On May 30, 2017, S&P Global Ratings affirmed its 'BB-' corporate credit and issue-level ratings on Empresa Generadora de Electricidad Itabo S.A. (Itabo). The outlook remains stable. Rationale The ratings on Itabo continue to reflect our expectation that despite its conservative credit metrics and adequate liquidity position, the company won't be able to withstand a sovereign stress scenario. As a result, the 'BB-' ratings on the Dominican Republic continue to limit the ratings on Itabo. This is because the country's electricity sector is heavily dependent on subsidies from the government. Therefore, we believe that the company's cash flow generation could be damaged under a sovereign default scenario. In turn, Itabo's 'bb' SACP continues to incorporate the company's resilient operating track record in terms of availability and energy production, and its maintenance of operating cost efficiency. In addition, it reflects Itabo's fairly low leverage combined with sound cash flow generation, as seen in its total debt to EBITDA of 1.2x and funds from operations (FFO) to total debt of 63.3% in 2016. On the other hand, Itabo's operation of a single asset, geographic concentration, as well as the challenges of operating in the country's electric power industry--given its weak regulatory framework with uncertain long-term financial sustainability--mitigates the positive rating factors. Itabo is a 295 megawatt coal thermal plant in operations since 1999. For the last five years, it has presented an average availability level above 80%, being responsible for 8% of the Dominican Republic's installed capacity and 12% of the country's generation in 2016. Itabo is in the lowest cost quartile, therefore, it's part of the base-load power plants of the national operator, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 2
Centro de Control de Energía. As such, it is dispatched according to its availability, and not according to peak demands, which results in resilient amounts of energy generation per year. Around 76% of Itabo's energy is sold under power-purchase agreements (PPAs) with three distribution companies in the country (EDE-Este, EDE-Norte, and EDE-Sur), which also guarantees its demand. The PPAs maturing in 2022 are denominated in dollars and adjusted to the U.S. CPI and coal prices on a monthly basis, offsetting currency and commodity risk. As of April 2017, the company had 55 days of sales outstanding. A sharp reduction of outstanding amount of accounts receivables attributable to the distribution companies (peak of 180 days in 2015) reduced Itabo's working capital needs. Nevertheless, the success of such a program is a risk factor that we will closely monitor. In our base-case scenario for Itabo in 2017 and 2018, we assumed the following: Macroeconomic variables that we view as relevant for the company, particularly GDP growth and inflation levels that affect certain costs. Our forecast for Dominican Republic's GDP growth is 5.5% in 2017 and 5% in the following years and for inflation to be 2.7% in 2017 and afterwards. The U.S. inflation of 2.5% in 2017 and 2.3% in 2018, which impacts tariff adjustments for the company's PPAs. Electricity generation to remain relatively stable at 1,771 gigawatt hours, with a slight decrease in revenue in 2018, given the expected start of operations of two coal-fired plants in the Dominican Republic's market. EBITDA generation of around $80 million in 2017 and $70 million in 2018. Receivables days to average 60-90 days, as part of the government efforts to support the electricity sector. We don't expect the energy subsidies to be reduced or terminated, which would have a major direct impact on Itabo's cash flow generation and operating sustainability. Capex for $20 million in 2017 and around $10 million afterwards. Dividend payout of around $40 million in 2017 and $30 million in 2018. Based on these assumptions, we arrive at the following credit measures for 2017 and 2018: Debt to EBITDA of less than 1.5x; FFO to debt of above 60%; and A $11 million shortfall in discretionary cash flow to debt in 2017 and a positive ratio of $11 million in 2018. Finally, the ratings incorporate our opinion that there is a low likelihood of timely and sufficient extraordinary support from the government, which is the owner of 49.97% of Itabo's shares, in the event of financial distress. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 3
Liquidity We assess Itabo's liquidity as adequate because sources of cash should exceed uses by at least 1.2x in the next 12 months, which provides protection against adverse market conditions. We also expect sources to cover uses even if EBITDA were to decline by 15%. Principal Liquidity Sources: Cash and short-term investments of $62.8 million as of Dec. 31, 2016; and FFO of $60 million in 2017. Principal Liquidity Uses: Working capital outflows of approximately $12 million; Capex of $20 million in the next 12 months; and Dividends of around $40 million in 2017. The company is not subject to any event of default covenant. Outlook The stable outlook on Itabo reflects the one on the sovereign. It also reflects our expectation that, in the next two years, the company will maintain a debt-to-ebitda ratio of less than 1.5x and FFO to debt above 60%. Downside scenario We will lower the ratings following a similar action on the sovereign. In addition, on a stand-alone basis, we can downgrade the company if its key credit metrics fall significantly short of our expectations, which could follow sustained periods of downtime. In such a scenario, we would expect to see FFO to debt of less than 45% and debt to EBITDA above 2.0x. Additionally, an increase in working capital needs due to higher accounts receivables that erodes the company's liquidity could trigger a downgrade. Upside scenario The potential for an upgrade is limited by the sovereign rating because Itabo is heavily dependent on government subsides. A positive action on the sovereign could lead to a similar action on Itabo. Ratings Score Snapshot Corporate Credit Rating: BB-/Stable/-- Business risk: Weak Country risk: High Industry risk: Moderately high Competitive position: Weak Financial risk: Modest WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 4
Related Criteria General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Ratings Affirmed Cash flow/leverage: Modest Anchor: bb+ Modifiers: Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Fair (no impact) Comparable rating analysis: Negative (-1 notch) Stand-alone credit profile: bb Related government rating: BB- Likelihood of government support: Low (no impact) Rating above the sovereign limitation: BB- Empresa Generadora de Electricidad Itabo S. A. Corporate Credit Rating BB-/Stable/-- Senior Unsecured BB- Certain terms used in this report, particularly certain adjectives used to WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 5
express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 30, 2017 6
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