SAN FRANCISCO--(BUSINESS WIRE)--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 cogeneration facility revenue bonds, series A (tax-exempt bonds) due June 2026 at 'CC';
--$33.1 million cogeneration facility revenue bonds, series B (taxable bonds) due June 2022 at 'CC'.
The 'CC' rating reflects Fitch's view of the credit quality of the Puerto Rico Electric Power Authority (PREPA). PREPA is the revenue counterparty under AES PR's power purchase agreement (PPA). PREPA's 'CC' rating with a Rating Watch Negative constrains the rating of AES PR.
KEY RATING DRIVERS
Contracted Revenue Profile - Revenue Risk: Weaker
The 25-year tolling-style PPA with a non-investment-grade counterparty effectively 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, concerns loom regarding the offtaker's ability to make future contractual payments.
Improving Operations - Operation Risk: Weaker
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. However, management has taken a proactive approach to limit future forced outages with encouraging initial results.
Manageable Supply Risk - Supply Risk: Midrange
Fuel supply risk is mitigated by a three-year, fixed-price fuel supply agreement sufficient to meet the project's expected fuel requirements through 2017. The short term 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.
Weak Structural Features - Debt Structure: Weaker
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 consistent with standard project finance structures. 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. Approximately 55% of the total debt outstanding, including unrated bank loans, is variable rate with over 80% synthetically fixed with investment-grade counterparties.
RATING SENSITIVITIES
Positive/Negative - Counterparty Rating: The rating is currently capped by PREPA's rating. A change in PREPA's long-term rating would likely impact the rating on AES Puerto Rico.
Positive - Operational Performance: Sustained improvements to plant availability or heat rate could enhance the long-term profile.
SUMMARY OF CREDIT
PREPA and certain bondholders agreed to a proposed recovery plan on Sept. 2, further reinforcing the notion that a restructuring of the issuer's debt obligations is probable. Any restructuring that does not result in full and timely payment of the power revenue bonds according to the original terms promised would likely result in a further downgrade to 'C' upon agreement by the required holders. In such an event, the rating of AES Puerto Rico would also be lowered to the rating of PREPA, reflecting the cap of the off-taker.
At AES PR, recent plant operations have improved substantially and the 2014 effective forced outage rate of 1.2% was the best in the plant's history. Average heat rates have also demonstrated considerable stability in recent quarters. The sponsor attributes improved performance to a renewed commitment to fund major capital expenditures since 2012.
The project has also added new agreements for fuel supply and ash management that support cash flow stability. The fuel supply agreement extends through 2017, offers more favorable and stable pricing, and provides more flexible payment terms. The ash management agreements promote the disposal of AES PR's ash products to on-island landfills for beneficial use, and are expected to be sufficient to cover all the project's ash management needs.
For more commentary on Fitch's Public Power rating action on PREPA, please see 'Fitch: PREPA Restructuring Probable, Cash Flow Concerns Remain' (dated Sept. 3, 2015), 'Fitch Maintains Puerto Rico Electric Power Auth's Rev Bonds on Negative Watch' (dated Dec. 11, 2014) and 'Fitch Downgrades Puerto Rico Electric Power Auth's Rev Bonds; Maintains Watch Negative' (dated June 26, 2014) available on Fitch's website at 'www.fitchratings.com'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867314
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991885
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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