AES Puerto Rico, which has a 524-MW coal-fired cogeneration plant that represents approximately 9% of the installed capacity in Puerto Rico, is facing continued trouble with its customer, the Puerto Rico Electric Power Authority (PREPA).
The plant has a long-term PPA expiring in 2027 with the PREPA, a state-owned entity that supplies virtually all of the electric power consumed in Puerto Rico 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 receivable 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,” said AES Corp. (NYSE: AES) in its annual Form 10-K report, filed on Feb. 26 at the Securities and Exchange Commission.
In February 2014, all agencies downgraded the Commonwealth of Puerto Rico and its public sector companies (PREPA included) to below investment grade. In June 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. At that point, the ratings were further reduced.
The downgrade on PREPA has had a direct impact on AES Puerto Rico’s bonds. While Fitch rates both AES PR and PREPA with CC, Moody’s rates AES Puerto Rico bonds (B3) three notches above PREPA (Caa3), citing as reasons the priority position of PREPA’s contractual payments to AES Puerto Rico as an operating expense as well as the project’s strategic importance to PREPA as an efficient, reliable and relatively low-cost source of power.
“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. “However, there can be no assurance as to the final terms of any restructuring or potential impacts on AES Puerto Rico.”
In December 2014 PREPA presented the first stage of the business plan to bondholders, which laid out key financial information on the current affairs of PREPA. The report, presented by PREPA’s Chief Restructuring Officer (CRO), complied with a key milestone in the Forbearance Agreement that expires on March 2 with bondholders. While the report is subject to strict confidentiality clauses, the CRO has stated that it does not contain recommendations or proposals on the utility’s capital structure, rates, payroll or any other fronts. During January, the CRO said that its recommendations will not be ready until June. The CRO is required to submit the recommendations to the Forbearance Committee which should state whether PREPA intends to restructure its debt combined with other restructuring actions on vendor negotiations, fuel cost contacts, capital needs and labor costs.
The 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, AES said. “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 Form 10-K said. “As the events pertaining to the Recovery Act continue to unfold, we concluded that there was no indicator of an impairment of the long-lived assets in Puerto Rico, which were $632 million and total debt of $528 million. Therefore, management believes the carrying amount of the asset group is recoverable as of December 31, 2014.”