TEXT-Fitch affirms Itabo Dominicana's IDR at 'B'

Fri Jan 18, 2013 5:04pm EST

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Jan 18 - Fitch Ratings has affirmed Itabo Dominicana SPV's (ITABO) Foreign
Currency and Local Currency IDRs at 'B' with a Stable Outlook. A full list of
rating actions follows at the end of this release.

ITABO's ratings reflect the electricity sector's high dependency on transfers
from the central government to service its financial obligations, a condition
that links the credit quality of the distribution companies (EDEs) and
generation companies in the country to that of the sovereign. Low collections
from end-users and high electricity losses have undermined distribution
companies' cash generation capacity, exacerbating generation companies'
dependence on public funds to cover the gap produced by insufficient payments
received from distribution companies.

Fitch expects the continuation of recent policy changes to allow EDEs to reach
breakeven cash flow generation in the medium-term. Yet, the expiration of the
stand-by arrangement (SBA) with the International Monetary Fund (IMF) on Feb.
28, 2012 holds the potential to derail the modest progress achieved by the
sector so far. ITABO's ratings also consider its low cost generation portfolio,
strong balance sheet and well-structured PPAs, which contribute to strong cash
flow generation and bolster liquidity.

The electricity sector registered energy losses of 31.9% and an average
collection rate of 89.8% both by October 2012, rendering the cash generation
capacity of the distribution companies very weak as evidenced by a Cash Recovery
Index of 61.2%, still below the target established in conjunction with the IMF
of 70%. This situation reinforces the sector's dependency on public transfers
and makes it a high risk sector, especially at a time of rising fiscal
vulnerabilities affecting the Central Government's finances (see Fitch, Dec.
11th, 2012).

ITABO's ratings incorporate its strong competitive position as one of the lower
cost thermoelectric generators in the country, ensuring the company's consistent
dispatch of its generation units. The company operates two low cost coal fired
thermal generating units and a third peaking plant that runs on Fuel Oil #2 and
sells electricity to three distribution companies in the country through
well-structured long term U.S. dollar denominated PPAs.

The company continued to post increasing EBITDA generation during the LTM period
ended September 2012. EBITDA increased to USD 60 million by the end of third
quarter 2012 from USD 27 million in FY2011. The operational profitability's
recovery follows the implementation of its coal purchasing strategy that
leverages the support of the AES Corp. to optimize contractual terms and ensure
increasing operational returns. Given the current trend in coal prices, Fitch
expects the company to continue strengthening its operation and financial
results based on the support strategy commented above.

This positive EBITDA evolution translated into adequate credit metrics as
evidenced by net leverage and coverage indicators with respect to EBITDA of 0.3x
and 2.3x respectively by September 2012. Fitch expects the coverage ratio to
continue improving as the company succeeds in its cost optimization strategy
aimed at reducing average coal prices and, consequently, generation costs.

For the LTM September 2012, ITABO generated USD100 million of CFFO, above the
USD14 million posted in FY2011. This result is explained not only by the
recuperation of operational results but also by the recent payment received from
the government in September 2012 to pay down account receivable arrears which,
in turn, reduced ITABO's Days of Sale to approximately 72 days. The government
had to finance this payment with a local bond placement given its current fiscal
vulnerabilities and weak cash generation capacity affecting the sector. Fitch
expects the continuation of arrears accumulation to add further volatility to
ITABO's cash flow generation in the future.

The company's debt structure is quite manageable with a seven year average life
which properly contributes to the reduction of liquidity risk. As of Sep. 30,
2012, ITABO's cash and marketable security holdings stood at of USD109 million
providing ample liquidity cushion to meet operational and financial needs.

Fitch affirms ITABO's ratings as follows:

--ITABO Dominicana SPV's FC IDR at 'B'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's FC and LC IDRs at 'B'; Stable
Outlook;
--ITABO Dominicana SPV's bond issuance maturing in 2020 at 'B/RR4';
--Empresa Generadora de Electricidad ITABO's National Long-Term issuer Rating at
'A-(dom)'; Stable Outlook;
--Empresa Generadora de Electricidad ITABO's local bond rating at 'A-(dom)'.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug 08, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
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