CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'BB' rating on 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. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Contracted Revenue Profile: The 25-year tolling-style power purchase agreement (PPA) with an investment-grade counterparty effectively mitigates capacity price, energy margin, and dispatch risks throughout the debt term, subject to project availability and heat rates.
Revenue Risk: Midrange
--Persistent Operational Issues: AES-PR has historically been susceptible to forced outages that have reduced availability and capacity payments. Management has taken a proactive approach to limit future forced outages with encouraging initial results. However, it remains unclear whether the project can achieve targeted availability levels on a consistent basis. Further, project heat rates continue to remain above the PPA fuel cost recovery threshold, though capital improvements and use of off-spec coal have lessened the gap. Consequently, the operating cost profile has exceeded original estimates leading to reduced margins and lower debt service coverage ratios (DSCRs).
Operating Risk: Weaker
--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. Fitch believes the term of the supply agreement is not a credit risk given the historical precedence for renewal and global, 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 AGREMAX product and raw, dry ash. Fitch believes that AES-PR's efforts have helped to offset near-term ash disposal concerns, but cash flow uncertainty is heightened without a permanent solution.
Supply Risk: Midrange
--Weaker Debt Structure: The project's bonds are fixed-rate and mature within the PPA term, but have back-loaded amortization profiles. The equity distribution, leverage, and debt service reserve provisions are generally consistent with similarly rated thermal power projects. AES-PR does not have O&M and major maintenance reserves, which increases the importance of operational stability and heightens the project's reliance on other sources of liquidity. Fitch recognizes that approximately 55% of the total debt outstanding, including unrated bank loans, is variable rate with over 80% synthetically fixed with investment-grade counterparties.
Debt Structure: Weaker
--Speculative-Grade Financial Profile: The Fitch rating case results in average DSCRs of over 1.15x during the next five years, consistent with the assigned rating category, based on stressed levels of availability, costs, heat rates, and interest rates. However, the DSCR profile becomes considerably weaker after 2020 when the contractual capacity payment is reduced, resulting in coverage of approximately 1.05x. Fitch notes that this coincides with the principal amortization period of the senior bonds and exposes bondholders to longer term operational risks.
RATING SENSITIVITIES:
--Operational Performance: Demonstrated ability or inability to improve and sustain equivalent availability factors above 90% or heat rate excursions for fuel cost recovery that changes the long-term DSCR profile could change the rating.
--Operating Costs: Consistently higher or lower cost profile from incremental maintenance, ash management, and fuel expenses/savings resulting in a material change in financial flexibility.
SECURITY:
All project revenues, controlled bank accounts, and security interest in the contract rights of AES-PR.
CREDIT SUMMARY:
The 12-month rolling average equivalent availability factor generally remained slightly below or at the 90% PPA requirement for full capacity payments since the last review. However, Fitch recognizes that management's corrective and preventative maintenance initiatives have borne encouraging results. The repairs have resulted in a reduction in the AES-PR's year-to-date forced outage rate to 3.7% from a historical rate in excess of 10% and a heat rate improvement of approximately 130 Btu/kWh.
The project's 2012 DSCR of 1.2x is generally consistent with the Fitch rating case. This underperformance is due to availability below and heat rates above Fitch base case expectations, as well as higher than anticipated maintenance and interest costs. Fitch notes that incremental maintenance costs were incurred to replace at-risk boiler tubes, among other repairs, that should help mitigate operational issues associated with the original project design. Fitch expects the impact of operational issues and higher costs to improve when all preventative and corrective maintenance is completed.
Fitch needs to observe several years of improved operations, with a corresponding increase in the Fitch rating case DSCR profile to at least 1.30x, for a positive rating action. Conversely, an inability to improve the operating and cost profiles over the next few years, resulting in Fitch rating case DSCRs remaining below 1.15x, may lead to a negative rating action. Fitch believes that AES-PR's ability to improve the DSCR profile to a level consistent with a higher rating will be a challenge, but views the current and expected future operational improvements as mitigants to further downgrades.
AES-PR is a special purpose entity that is an indirect wholly owned facility of AES Corporation (rated 'BB-', 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 Puerto Rico Electric Power Authority (rated 'BBB-', Stable Outlook) under the terms of a 25-year PPA, which is a modified tolling agreement that reimburses fuel, subject to heat rate requirements, and certain other operating costs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Thermal Power Projects' (June 17, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710786
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798781
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