AES Corp. (NYSE: AES) said that its coal-fired AES Puerto Rico plant, despite some issues lately with late payments for its electricity output, is positioned well to run in Puerto Rico’s high-cost electricity market.
AES said in its Aug. 7 Form 10-Q quarterly report: “Our subsidiary in Puerto Rico has a long-term [power purchase agreement] with the Puerto Rico Electric Power Authority (‘PREPA’), a state-owned entity that supplies virtually all of the electric power consumed in the Commonwealth and generates, transmits and distributes electricity to 1.5 million customers. As a result of macroeconomic challenges in the country, including a seven-year recession, PREPA faces economic challenges including, but not limited to reliance on high cost fuel oil, decline in electricity sales, high customer power rates, high operating costs, past due accounts receivables from government institutions, and very low liquidity along with challenges obtaining financing due to the recent downgrades, and has struggled to honor its payment obligations to electricity generators on a timely basis.”
As a result of these issues, AES Puerto Rico’s receivables balance has increased to $95m outstanding as of June 30, 2014, of which $27m was overdue and days sales outstanding from PREPA has deteriorated, which has caused the AES Puerto Rico business to delay some payments to its suppliers. Subsequent to June 30, the overdue receivables of $27m have been collected, AES noted.
In February 2014, all rating agencies downgraded the Commonwealth of Puerto Rico and it’s public sector companies (PREPA included) to below investment grade. On June 28, the Governor of Puerto Rico signed the Recovery Act, which allows public corporations to adjust their debts in the interest of all creditors, and establishes procedures for orderly enforcement. After that signing of the Recovery Act, the ratings were further reduced, AES pointed out. Standard & Poor’s has yet to lower the Commonwealth’s rating but is expected to do so in the near term.
“We believe that AES Puerto Rico’s unique position as the lowest cost energy producer and cost-effective alternative for PREPA relative to fuel oil generated power, positions the business well and reduces the probability of negative impacts from a potential PREPA restructuring process,” said AES. “If AES Puerto Rico fails to receive payment in accordance with the terms of the PPA with PREPA, its liquidity issues could worsen, which could further impact AES Puerto Rico’s ability to meet its obligations.”
AES added: “Our Puerto Rico business will take all actions necessary to protect its interests, whether through negotiated agreement with PREPA or through enforcement of its rights under the PPA. As the events pertaining to the Recovery Act continue to unfold, we concluded that there is no indicator of an impairment of the long-lived assets in Puerto Rico, which were $620 million and total debt of $584 million, and there is no reason to believe the carrying amount of the asset group was not recoverable as of June 30, 2014.”
A March 2014 U.S. Energy Information Administration fact sheet on Puerto Rico’s energy supply said about coal generally, and the AES plant in particular: “The island has one coal-fired electricity generating plant, at Guayama. The plant uses circulating fluidized-bed combustion and began operation in 2002. Typically, 1.6 million short tons of coal are imported annually from Colombia to supply the 454-megawatt plant. Ash from coal combustion is recycled on site into a partially solidified aggregate that is used in asphalt and concrete for road construction and other applications.”
EIA said about PREPA: “Puerto Rico’s electricity is supplied by PREPA, a government agency that owns the electric distribution system for the main island, Vieques, and Culabra, as well as all but two generating stations. PREPA (in Spanish, Autoridad de Energía Eléctrica, or AEE) began in the 1920s as a government irrigation system, but its responsibilities grew over the years to encompass island electrification. Puerto Rico typically gets two-thirds of its electricity from petroleum, generated mainly at six stations with steam turbines, combustion turbines, and/or combined cycle technology. The balance of PREPA power supply is almost evenly divided between natural gas and coal generation, with a small fraction from hydroelectric generators. The natural gas- and coal-fired plants are owned and operated by two independent power producers who sell their output to PREPA on long-term contracts.”