Fitch Ratings has maintained the Rating Watch Negative on the following AES Puerto Rico L.P. (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority:
- $161.87 million ($160.57 million) cogeneration facility revenue bonds series A (tax-exempt bonds) due June 2026 ‘C’;
- $33.1 million ($32.83 million) cogeneration facility revenue bonds, series B (taxable bonds) due June 2022 ‘C’.
KEY RATING DRIVERS
Summary: AES PR’s ‘C’ rating reflects Fitch’s view of the credit quality of the Puerto Rico Electric Power Authority (PREPA), which Fitch rates ‘D’. AES PR’s payment default and rating action by Fitch is likely if PREPA fails to make payments under the power purchase agreement (PPA) by the end of January 2018 and is a real possibility if PREPA tries to renegotiate the PPA under bankruptcy proceedings.
Revenue Risk: Weaker
Contracted Revenue Profile: The 25-year tolling-style PPA with a non-investment-grade counterparty mitigates some risk of exposure to capacity price, energy margin, and dispatch risks throughout the debt term, subject to project availability and heat rates. However, there are concerns regarding the offtaker’s ability to make future contractual payments given its financial and operational difficulties that have only been exasperated by Hurricane Maria.
Operation Risk: Weaker
Uneven Operations: AES-PR has historically been susceptible to forced outages that have reduced availability and capacity payments. Further, the operating cost profile has exceeded original estimates. Management has taken a proactive approach to limit forced outages with some results, though extended scheduled outages have negatively impacted project availability in some periods.
Supply Risk: Midrange
Manageable Supply Risk: Fuel supply risk is mitigated by a two-year, fixed-price fuel supply agreement sufficient to meet the project’s expected fuel requirements through 2019. The short-term risk of the agreement is mitigated by the historical precedence for renewal and liquid market for coal. Fuel price risk is mitigated by the tolling-style PPA, subject to heat rates. Ash inventory is actively managed by the project via the sale of its various ash products. AES-PR’s efforts have helped to offset near-term ash disposal concerns, but cash flow uncertainty is heightened without a permanent solution.
Debt Structure: Weaker
Weak Structural Features: The project’s bonds are fixed-rate and mature within the PPA term but have back-loaded amortization profiles. AES-PR does not have O&M or major maintenance reserves, which increases the importance of operational stability and heightens the project’s reliance on other sources of liquidity. The equity distribution, leverage, and debt service reserve provisions are consistent with standard project finance structures. Approximately 55% of the total debt outstanding, including unrated bank loans, is variable-rate with over 80% synthetically fixed with investment-grade counterparties.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- An upgrade to PREPA’s long-term rating.
- Sustained improvements to plant availability or heat rate.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- PREPA’s continued failure to meet its payment obligations through January 2018 would likely impact the rating on AES Puerto Rico.
- PREPA’s attempts to renegotiate the PPA under its insolvency proceedings that negatively impact the project’s cash flows and ability to service debt.
- Prolonged failure to repair damaged transmission lines and resume generation would likely impact the rating on AES Puerto Rico.
- Poor plant performance could limit the project’s standalone credit profile.
AES PR’s rating reflects the rating of PREPA, which Fitch downgraded to ‘D’ on July 6, 2017, after PREPA commenced the insolvency proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) on July 2, 2017 and failed to pay principal and interest due on its revenue bonds on July 3, 2017.
PREPA’s initiation of insolvency proceedings represents a technical default under AES PR’s financing documents; however, the bondholders have not declared a default or initiated any action. The project’s unique position in Puerto Rico’s power market suggests to Fitch that PREPA may continue to make payments to the project. PREPA will need the power supplied by AES PR, as it is Puerto Rico’s lowest cost power producer. Nevertheless, there is a risk that PREPA will not have sufficient funds to pay the project or will try to renegotiate the PPA in its restructuring process, adversely affecting AES PR’s cash flows.
As of now the project has not received payments from PREPA for several months, greatly affecting its ability to meet payment obligations. Under an agreed Forbearance Agreement the project has negotiated with the lending banks that the November principal payment owed under bank loans will be postponed to March 2018 providing it with additional time to collect owed revenues and service debt. Failure to pay and execution of the Forbearance Agreement stipulating payment deferral and agreement not to pursue any remedies by the banks is technically an event of default under both the bank and bond financing documents. Similarly to the event of default caused by PREPA’s insolvency proceedings, this event of default entitles the bondholders to seek remedies. However, Fitch is not aware of any plans in either case to pursue such action. The project has sufficient cash in its debt service reserve fund to meet its bond payment obligations both in Dec 2017 and June 2018. This agreement with the lending banks provides the project with several months of breathing room, but its ability to operate and service debt depends on PREPA’s performance under the PPA. If PREPA does not start paying under the PPA, the project will not have sufficient cash to finance its operations starting early next year.
Although according to the management the project sustained minimal physical damage from Hurricane Maria, the plant had to declare force majeure on Sept. 20 and was not available for several weeks. Both units were available again by Oct. 19, and although the plant could not generate power since all the transmission lines are damaged, the project is entitled to its capacity revenues.
PREPA has hired Cobra Acquisitions, a subsidiary of Mammoth Energy Services, to repair a five-mile stretch of the transmission line that would connect the project back to the grid at the Aguirre Plant substation. The management estimates that the transmission line repairs will be completed by the middle of December allowing it to resume generation and earn energy revenues.
Since the last review in May 2017 and until the hurricane the project performed unevenly operationally. It experienced outages in July and August. However, the project’s rolling 12-month equivalent availability factor (EAF) stayed above or very close to required threshold allowing it to earn almost 100% of its capacity revenues for those months.
Due to the hurricane and force majeure September and October EAF were at 63.5% and 63.4% respectively. The project is still not connected to the transmission lines and cannot generate power depriving it of this revenue source.
Under the PPA, AES PR must maintain a 12-month rolling EAF above 90% to earn the full capacity payment from PREPA. Over the past five years, the project’s EAF under the PPA has drifted between 85%-95% with intermittent dips below the PPA threshold. The project’s 12-month rolling average dipped slightly below 90% starting in August through October 2017 due to outages and then the hurricane, which caused a reduction in capacity payments earned. As of Aug. 25, 2017 the 12-month historical DSCR stood at 1.14x. The project has access to debt service reserve funds of $12.2 million (bank debt) and $13.76 million (bond debt).
For more commentary on Fitch’s Public Power rating action on PREPA, please see ‘Fitch Downgrades Puerto Rico Electric Power Auth’s IDR and Rev Bonds to ‘D’’ (dated July 6, 2017) available at ‘www.fitchratings.com’.
AES Puerto Rico, L.P. owns and operates a net 454(MW) coal-fired circulating fluidized bed combustion power plant in Guayama, Puerto Rico. The project delivers electric energy and capacity to Puerto Rico Electric Power Authority, a public power utility, under the terms of a 25-year PPA. The PPA is structured as a modified tolling agreement that reimburses the project’s fuel and O&M costs. The project is Puerto Rico’s lowest cost power producer.