AES Corp. (NYSE: AES) reported in its Nov. 6 Form 10-Q statement that it it has having continuing problems with the financially-strapped Puerto Rico Electric Power Authority making timely payments for power out of its coal-fired, 524-MW power plant in Puerto Rico.
“Our subsidiary in Puerto Rico has a long-term PPA 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,” said AES. “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.
“AES Puerto Rico‘s receivables balance as of September 30, 2014 is $95 million, of which $33 million is overdue and days sales outstanding from PREPA has deteriorated, which has caused our business to start to be delayed in our payments to suppliers. Subsequent to September 30, 2014, overdue receivables of $30 million have been collected.
“In February 2014, all agencies downgraded the Commonwealth of Puerto Rico and it’s public sector companies (PREPA included) to below investment grade. On June 28, 2014, the Governor of Puerto Rico signed into law the Recovery Act, which allows public corporations to adjust their debts in the interest of all creditors, and establishes procedures for the orderly enforcement. With the recent passing of the Recovery Act, the ratings were further reduced. The downgrade on PREPA has had a direct impact on AES Puerto Rico’s bonds, except for Moody’s which rates the bonds above the state-owned corporation given AES Puerto Rico is the lowest cost producer of electricity. 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. However there can be no assurance as to the final terms of any restructuring or potential impacts on AES Puerto Rico.”
As a result of these events, AES said it may face a loss of earnings and/or cash flows from the affected businesses (or be unable to exercise remedies for a breach of the PPA) and may have to provide loans or equity to support affected businesses or projects, restructure them, write down their value and/or face the possibility that these projects cannot continue operations or provide returns consistent with our expectations, any of which could have a material impact on the company.
“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,” the company added. “In October 2014, the Parent Company reached an agreement with an investor in AES Puerto Rico’s preferred shares to retire the investment at a fixed redemption value of $52 million. The redemption is expected to be completed by the end of 2014. 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 $635 million and total debt of $594 million. Therefore, management believes the carrying amount of the asset group is recoverable as of September 30, 2014.”