Fitch Ratings said Dec. 16 that it has maintained the Rating Watch Negative on various AES Puerto Rico LP (AES PR) securities that are issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority, due to continuing financial issues for this AES Corp. (NYSE: AES) subsidiary and its 454-MW, coal-fired power plant.
Fitch said that AES PR’s ‘C’ rating reflects Fitch’s view of the credit quality of the Puerto Rico Electric Power Authority (PREPA), which Fitch rates ‘C’ with a Rating Watch Negative. PREPA is the revenue counterparty under AES PR’s power purchase agreement (PPA) and its rating 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, Fitch noted. “However, concerns loom regarding the offtaker’s ability to make future contractual payments,” it added.
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, Fitch explained. Coal 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 wrote.
Operationally, Fitch said that AES PR has exhibited stable performance in 2016 with a year-to-date equivalent availability factor (EAF) of 91.5% through November. The primary maintenance issue in 2016 was occasional tube leaks, which has been a persistent source of outages for the project. Over the past 12 months through November, the EAF remains below 90%, as this period still captures a portion of last fall’s 11-week outage. During the fourth quarter (4Q) of 2015, activities and repairs during a major scheduled outage at Unit 2 drove equivalent availability for the quarter to 66%. These activities included a major overhaul of all sections of the steam turbine generator, generator rewind, refractory replacement and refurbishment, and heat exchanger tube replacement.
Under the PPA, AES PR must maintain a 12-month rolling EAF above 90% to earn the full capacity payment from PREPA. Over the past five years, the project’s EAF under the PPA has drifted between 85%-95% with intermittent dips below the PPA threshold. However, the uncharacteristically low availability in 4Q 2015 caused the rolling EAF to remain sub-90%, even as plant performance has improved since the outage was completed, Fitch reported. The resulting lower PPA capacity payments reduced operating cash flow over the past four quarters.
Said AES in its Nov. 4 quarterly Form 10-Q report: “On June 28, 2014, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) was signed into law, which allows public corporations, including PREPA, to adjust their debts. As a result of this event, on July 6, 2014, PREPA entered into a Forbearance Agreement with its lenders in order to permit an opportunity for negotiation of a possible financial restructuring of PREPA. In February 2015, the negotiating position of PREPA was weakened when the federal court deemed the Recovery Act unconstitutional.
“The Supreme Court upheld the federal court’s opinion on June 13, 2016. Despite this setback, PREPA managed to extend the expiration of the Forbearance Agreement several times, achieving in December 2015 certain preliminary restructuring agreements, called Restructuring Support Agreements (“RSAs”). Under these agreements, bondholders would take a reduction in principal after exchanging their bonds for new securities that would be backed by a special charge on clients’ bills. For its part, the utility would receive five-year debt-service relief, while freeing up cash to modernize its power plants.
“On June 28, 2016, PREPA authorized the issuance of the restructuring bonds, based on the approval of the Puerto Rico Energy Commission of a transition charge and adjustment mechanism that PREPA had proposed to pay for the utility’s securitized debt. PREPA is expecting to complete this new bond issuance by December 31, 2016. As a result of the impending restructuring, Fitch has downgraded PREPA’s bonds to “C”, from “CC”, causing the downgrade of AES Puerto Rico, as PREPA is our only off taker.
“On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA creates a structure for exercising federal oversight over the fiscal affairs of U.S. territories and allows for the establishment of an Oversight Board with broad powers of budgetary and financial control over Puerto Rico. PROMESA also creates procedures for adjusting debts accumulated by the Puerto Rico government and, potentially, other territories. Finally, PROMESA expedites the approval of key energy projects and other critical projects in Puerto Rico. The impact PROMESA will have on PREPA’s contracts and PPA is uncertain.
“Other than the downgrade of AES Puerto Rico discussed above, there have been no adverse impacts to AES Puerto Rico due to PREPA’s financial challenges. If PREPA continues to face challenges, or those challenges worsen, or otherwise impact PREPA’s ability to make payments to AES Puerto Rico, there could be a material impact on the Company.”