CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded AES Puerto Rico L.P.'s (AES-PR) $161.87 million tax-exempt senior cogeneration facility revenue bonds due 2026 and $33.1 million taxable senior cogeneration facility revenue bonds due 2022 to 'BB+' from 'BBB-'. The Rating Outlook remains Negative.
The downgrade reflects continuing volatility in availability leading to reduced capacity payments, and costs significantly exceeding original forecasts at levels expected to persist. The Negative Outlook reflects operational issues, which could reduce cash flows to a level consistent with a lower rating.
KEY RATING DRIVERS:
--Revenue Stability: The 25-year tolling-style power purchase agreement (PPA) with an investment-grade counterparty, Puerto Rico Electric Authority (PREPA; rated 'BBB+', with a Stable Outlook by Fitch), effectively mitigates energy and coal price risk through the debt term. However, failure to maintain PPA availability thresholds has reduced fixed capacity payments.
--Operating Cost Profile: The project's operating costs have been and are expected to continue rising due to additional costs associated with corrective and preventative maintenance and repairs, as well as increased coal prices beginning in 2013. Fitch notes that the project's heat rate has consistently exceeded the PPA contracted heat rate.
--Additional Forced Outages: AES-PR has been susceptible to forced outages that have reduced availability. Management has taken a proactive approach to limiting future forced outages by making corrective repairs when necessary and establishing ongoing monitoring and testing. However, outages have persisted and it remains unclear whether completed and scheduled repairs will be sufficient to achieve targeted availability levels.
--Ash Management: AES-PR continues to actively manage its ash inventory via the sale of its AGREMAX product and raw ash for the construction of rural roads, landfill covers, and waste water stabilization. Currently, all sales are on a project-by-project basis, but management indicated that there has been interest for a long-term solution. Fitch believes that AES-PR's efforts have helped to offset near-term concerns, but cash flow uncertainty is increased without a permanent solution to ash management.
WHAT COULD TRIGGER A RATING ACTION:
--Reduced Availability: Failure to improve and sustain equivalent availability factors above 90% resulting in lower revenues and debt service coverage ratios (DSCRs).
--Higher Operating Cost Profile: An inability to effectively manage costs that reduces operating margins and cash flow available for debt service.
SECURITY:
All project revenues, controlled bank accounts, and security interest in the contract rights of AES-PR.
CREDIT SUMMARY:
Management has been proactive in making repairs and scheduling regular inspections/tests to reduce the number and financial impact of future forced outages, but outages may persist going forward leading to lower capacity revenues. Increased operating costs include higher coal pricing for a supply contract in 2013 with initial estimates approximately 25% higher than current prices.
Although fuel costs are recovered under the PPA, the project's heat rate is above the contracted heat rate and the potential financial impact is a credit concern. Fitch notes that major turbine overhauls in 2012 and 2013 are expected to improve efficiency and reduce heat rates, which should have a favorable impact on cash flows. The project should demonstrate availability factor stability, as well as operational and financial benefits from the additional preventative costs being incurred by the project, in order to resolve the Rating Outlook.
Fitch believes that AES-PR's higher operating cost profile and lower availability have significantly reduced financial flexibility at the project. Rating Case DSCRs based on stressed levels of availability, costs, heat rates, and interest rates suggest coverage could fall below 1.4 times (x), consistent with the assigned rating category, and may fall below 1.2x following contractually reduced capacity payments as the bonds near maturity. Fitch notes that the back-loaded debt service profile of the senior bonds increases bondholders' exposure to longer term operational challenges.
AES-PR is a special purpose entity that is an indirect wholly owned facility of AES Corporation (rated 'B+', Stable Outlook). The project was formed in 1994 to own and operate a net 454.3 megawatt coal-fired circulating fluidized bed combustion power plant in Guayama, Puerto Rico. The project's main revenue sources are capacity and energy sales to PREPA under the terms of a 25-year PPA, which is a modified tolling agreement that reimburses fuel, subject to heat rate requirements, and certain operating costs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' - 16 Aug. 2011
--'Rating Criteria for Thermal Power Projects' - 20 June 2011.
Applicable Criteria and Related Research:
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=639073
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
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