Fitch Ratings said April 23 that it has maintained various AES Puerto Rico LP (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority on Rating Watch Negative.
The ‘CC’ ratings reflect Fitch’s view of the credit quality of the financially-troubled Puerto Rico Electric Power Authority (PREPA), which is the revenue counterparty under AES PR’s power purchase agreement. PREPA’s ‘CC’ rating and Negative Watch constrain the rating of AES PR, which is an AES Corp. (NYSE: AES) subsidiary that operates a coal-fired power plant. AES has been reporting for some time that PREPA has been late making payments for this electricity.
“The 25-year tolling-style power purchase agreement (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,” Fitch noted. “However, concerns loom regarding the offtaker’s ability to make future contractual payments.”
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, Fitch said.
Fuel supply risk is mitigated by a three-year, fixed-price fuel supply agreement sufficient to meet the project’s expected fuel requirements. 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.
Since August 2014, PREPA and its creditors have maintained forbearance agreements to provide temporary relief related to PREPA’s maturing bank lines of credit to allow for additional time for negotiations with creditors. The current agreements extend the forbearance to April 30, though the lenders have the right to terminate the forbearance at any time, with written notice to PREPA. Negotiations are ongoing though a full comprehensive public plan is not anticipated until July 15. Fitch said it believes that a restructuring of PREPA’s debt obligations remains likely and has therefore maintained the rating of PREPA’s power revenue bonds at ‘CC’ with a Negative Watch.
At AES PR, 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, Fitch said. 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.
On April 24, the Ad Hoc Group of PREPA Bondholders said that it met with Alix Partners and Millstein & Co. the prior day to receive the Puerto Rico Electric Power Authority’s response to the Ad Hoc Group’s revitalization plan for Puerto Rico.
“We appreciate PREPA and its advisors providing detailed feedback in response to the Ad Hoc Group’s revitalization plan. The Ad Hoc Group looks forward to working with PREPA and its professionals to refine a long-term plan for PREPA that is in the best interest of all stakeholders. However, while we have had limited time to review PREPA’s critiques, we believe that a number of the criticisms are based on fundamentally flawed analysis or a misunderstanding of our proposal,” said Stephen Spencer of Houlihan Lokey, the Ad Hoc Group’s financial advisor.
The Ad Hoc Group’s revitalization plan would invest $2 billion to modernize PREPA’s aging generation fleet, comply with environmental regulations, provide meaningful economic growth in Puerto Rico, and improve safety for PREPA employees. It would also provide PREPA customers with stable electricity rates that are significantly lower than recent rates and create thousands of new sustainable jobs, while continuing to service contractual debt obligations. While the Ad Hoc Group and its advisors strongly disagree with a number of the criticisms presented by PREPA, the Ad Hoc Group said it looks forward to working constructively with PREPA and its advisors to reconcile outstanding differences in a continuing effort to bring novel, cost-effective solutions to the various issues currently facing the utility.