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Fitch Maintains AES Puerto Rico L.P.’s Senior Bonds on Rating Watch Negative

By on December 16, 2016

This photo shows 1 State Street Plaza, home of Fitch Ratings, Sunday, Oct. 9, 2011 in New York. (Henny Ray Abrams/AP)

1 State Street Plaza, home of Fitch Ratings in New York. (Henny Ray Abrams/AP)

SAN JUAN – Fitch Ratings has published a release announcing it has maintained its “Rating Watch Negative” on AES Puerto Rico L.P. (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority.

The watch applies to the following securities:

–$161.87 million ($160.57 million) cogeneration facility revenue bonds series A (tax-exempt bonds) due June 2026 at ‘C’;

–$33.1 million ($32.83 million) cogeneration facility revenue bonds, series B (taxable bonds) due June 2022 at ‘C’.

AES PR’s ‘C’ rating reflects Fitch’s “view of the credit quality” of the Puerto Rico Electric Power Authority (PREPA), which it rates ‘C’ with a Rating Watch Negative. “Prepa is the revenue counterparty under AES PR’s power purchase agreement (PPA) and its rating constrains the rating of AES PR,” the rating company explains.

The following was released Friday by Fitch ratings regarding its view of the aforementioned AES PR securities.  

KEY RATING DRIVERS

Revenue Risk: Weaker

Contracted Revenue Profile: 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.

Operation Risk: Weaker

Improving 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 encouraging results, though extended scheduled outages have recently negatively impacted project economics.

Supply Risk: Midrange

Manageable Supply Risk: 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.

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. 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 – 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.

Negative – Poor plant performance resulting in cash flow insufficient to meet mandatory debt obligations could limit the project’s standalone credit profile.

Positive – Sustained improvements to plant availability or heat rate could enhance the long-term profile.

SUMMARY OF CREDIT

AES PR’s rating reflects the rating of PREPA, which was downgraded to ‘C’ with a Rating Watch Negative on June 27, 2016. As the key revenue counterparty, PREPA’s credit quality constrains the project rating. Any rating change in PREPA’s rating would likely lead to similar rating action for AES PR.

Operationally, AES PR has exhibited stable performance in 2016 with a year-to-date equivalent availability factor (EAF) of 91.5% through November. The primary maintenance issue in 2016 was occasional tube leaks, which has been a persistent source of outages for the project. Over the past 12 months through November, the EAF remains below 90%, as this period still captures a portion of last fall’s 11-week outage. During the fourth quarter (4Q) of 2015, activities and repairs during a major scheduled outage at Unit 2 drove equivalent availability for the quarter to 66%. These activities included a major overhaul of all sections of the steam turbine generator, generator rewind, refractory replacement and refurbishment, and heat exchanger tube replacement.

 

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