Fitch Ratings said Oct. 6 that it has maintained the Rating Watch Negative on various AES Puerto Rico LP (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority.
AES Puerto Rico, controlled by AES Corp. (NYSE: AES), operates a coal-fired power plant that sells power to the financially-strapped Puerto Rico Electric Power Authority. It operates the 454-MW Guayama power plant.
A ‘CC’ rating for these AES Puerto Rico securities reflects Fitch’s view of the credit quality of the Puerto Rico Electric Power Authority (PREPA). PREPA’s ‘CC’ rating with a Rating Watch Negative constrains the rating of AES PR.
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 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. Coal ash inventory is actively managed via the sale of 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.
PREPA and certain bondholders agreed to a proposed recovery plan on Sept. 2, further reinforcing the notion that a restructuring of the issuer’s debt obligations is probable, Fitch said. Any PREPA restructuring that does not result in full and timely payment of the power revenue bonds according to the original terms promised would likely result in a further downgrade to ‘C’ upon agreement by the required holders. In such an event, the rating of AES Puerto Rico would also be lowered to the rating of PREPA, reflecting the cap of the off-taker.
At AES PR, recent 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.