Fitch Ratings said Dec. 18 that it has maintained the Rating Watch Negative on two sets of AES Puerto Rico LP (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority.
AES Puerto Rico is an AES Corp. (NYSE: AES) subsidiary that runs a coal-fired power plant that supplies the financially-troubled Puerto Rico Electric Power Authority.
The ‘CC’ ratings on these securities reflects Fitch’s view of the credit quality of the Puerto Rico Electric Power Authority (PREPA). PREPA is the revenue counterparty under AES PR’s power purchase agreement (PPA). PREPA’s ‘CC’ rating with a Rating Watch Negative constrains the rating of AES PR.
The 25-year tolling-style 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. However, concerns loom regarding the offtaker’s ability to make future contractual payments, Fitch said.
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 added.
Fuel supply risk is mitigated by a three-year, fixed-price fuel supply agreement that meets the plant’s expected fuel requirements through 2017. The short term of the agreement is mitigated by a history of renewal and a 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. AES-PR’s efforts have helped to offset near-term ash disposal concerns, but cash flow uncertainty is heightened without a permanent solution, Fitch noted.
On Sept. 2, PREPA announced that it had reached a restructuring agreement in principle with certain bondholders holding about 35% of its aggregate principal amount outstanding. If executed, the proposal would preclude full and timely payment of PREPA’s power revenue bonds according to the original terms and could lead to a further downgrade, said Fitch. 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.