Approximately $194 million of secured bonds affected
New York, December 21, 2016 -- Moody's Investors Service has affirmed the B3 rating on AES Puerto Rico,
L.P.'s (AES PR or Project) $194 million of senior
secured bonds outstanding. The bonds were issued on behalf of AES
PR by the Puerto Rico Industrial, Tourist, Educational,
Medical, and Environmental Control Facilities Financing Authority.
The outlook for AES PR is revised to developing from negative.
RATINGS RATIONALE
AES PR's revenues and cash flows are entirely dependent upon the contractual
sale of electricity to the Puerto Rico Electric Power Authority (PREPA;
Caa3, developing) pursuant to a 25-year power purchase agreement
(PPA), expiring in 2027, which is one year beyond the maturity
of the bonds. PREPA's Caa3 rating incorporates the utility's
weak liquidity and our belief that default risk, in the form of
either a near-term consensual restructuring or a payment default
remains high.
Today's affirmation of the B3 rating on AES PR recognizes that the
PREPA contagion risk for the Project's bondholders continues to
be mitigated via the priority position of PREPA's contractual payments
to AES PR as an operating expense, along with the strategic importance
of this low cost power supply to PREPA, including its relevant role
in providing an essential service to the citizens of Puerto Rico.
While we understand that new legislation has language which would allow
parties to reject contracts, we believe that AES PR's unique position
as a cost-effective, coal-fired plant alternative
for PREPA relative to fuel oil generated power (AES PR cost is currently
about 8.5 cents/kwh vs. PREPA's 20 cents/kwh),
positions the asset well and reduces the probability that PREPA would
seek to reject the contract. The affirmation acknowledges that
certain terms of the PPA are attractive to PREPA from a cost perspective.
Specifically, the failure of AES PR to reach availability requirements
enables PREPA to reduce the amount of the capacity payment. Moreover,
the terms of the PPA requires PREPA to compensate AES PR at a lower heat
rate than the plant has historically performed, leading to a lower
energy payment for PREPA than AES PR's actual costs. Also,
capacity payments under the PPA will decline materially starting in 2020,
making the asset that much more attractive to PREPA. Moody's
also considers the secured position of the AES PR's project lenders and
the additional protections, such as debt service reserves (DSR)
and a cash flow waterfall, provided by the project financing structure,
as well as project's strong liquidity profile.
Moody's notes that the Project had weaker than expected financial
and operating performance in 2016 requiring a draw on the DSR to cover
scheduled debt service this year. Furthermore, the Project's
financial performance during 2017 will face some challenges as scheduled
debt service will be elevated that year. However, given the
level of liquidity at the project, these issues are largely captured
in the B3 rating level.
AES PR's operating and financial performance in 2016 were impacted
by an extended outage in late 2015, which dampened availability
below the guarantee incorporated in the PPA for much of the year,
resulting in a lower capacity payment under the PPA, and higher
associated operating and maintenance costs. The outage occurred
in October 2015 as part of a scheduled major maintenance that uncovered
the need to complete a re-wind of the generator in Unit 2.
The outage lasted 80 days through October, November and December
2015, but because of the rolling 12-month nature of the availability
calculation, it impacted financial performance for most of 2016.
Also negatively affecting financial performance was a small outage during
May 2016 owing to a tube leak.
Despite the contractual nature of the AES PR revenues, the Project's
financial performance and metrics are dependent on operating performance
and expense management. The payments under the PREPA PPA have both
a fixed capacity payment and a variable payment to cover variable costs,
including fuel. The full capacity payment is dependent upon the
availability factor being at or above 90% over a twelve month period.
As of October 2016, however, the rolling 12-month availability
was 84.3%, owing to the aforementioned extended outage,
resulting in AES PR not receiving its full capacity payment from PREPA.
As the year progresses, the impact of the outage is expected to
roll off due to the rolling 12-month nature of the calculation.
During 2016, the Project was also impacted by a one-time
payment made as part of a litigation settlement. Moreover,
the Borrower's faced higher debt service in 2016 owing to a term
out of a $25 million working capital facility that was drawn just
prior to its expiration in November 2014. The term loan is expected
to be repaid in quarterly installments over the remaining life by November
2017.
Taken together, the weaker financial and operating performance,
the litigation settlement and the higher debt service, resulted
in a debt service coverage ratio (DSCR) calculated for the 12 month period
to the end of the third quarter of 2016 to drop to 0.87x vs.
1.18x for the full year 2015. To meet this shortfall,
AES PR used approximately $6 million of unrestricted cash and a
$6 million draw from its bank DSR to cover scheduled debt service
this year. While a credit negative, our rating affirmation
recognizes that had the litigation settlement payment not occurred during
2016, AES PR would have had a DSCR slightly in excess of 1.0x
for the 12 month period to the end of the third quarter of 2016 and would
have not required the use of unrestricted cash and a draw of the DSR during
this period.
Moody's expects the Project's financial and operating performance
to improve in 2017, barring any unforeseen operational issues.
As with any large power generation facility, there is always the
possibility that operating problems with surface. However,
the likelihood of this happening in 2017 is reduced given the significant
capital improvements taken during the major maintenance and generator
re-wind of late last year to improve operating performance.
Management expects availability to be 91% in 2017, which
is above the required 90% minimum in the PPA, enabling the
Project to receive its full capacity payment under the PPA. AES
PR is already seeing this improvement. Availability for the 10
months through October 2016 (which excludes the impact of the outage in
the last months of 2015) was 90.7%, and AES PR's
management expects that full year 2016 availability will be 91.7%.
Further, the one-time litigation payment will not be recur
in 2017. However, we expect AES PR DSCR for 2017 to be around
0.92x owing to substantially higher debt service requirements as
the final payment of the Tranche A term loan and the final payment due
under the working capital facility term loan are due in November 2017.
AES PR expects to utilize available unrestricted cash from its balance
sheet to satisfy the shortfall; however, it is not expected
to dip again into the DSR. Once AES PR gets through the critical
year of 2017, total debt service will drop considerably in 2018
and beyond, and the Project is expected to comfortably cover debt
service going forward.
As alluded to, the Project has adequate liquidity to get through
the next year, should operational problems materialize. Balance
sheet cash approximates $20 million. Each of the bank and
the bonds tranches has their own DSR. The required DSR for the
bank loans is $35 million, representing six months of principal
and interest. At the beginning of 2016, this was backed up
by $18 million in cash and by a $17 million liquidity/reserve
facility provided by a group of banks that is committed through November
2017 (and is co-terminus with the Tranche A term loan).
There was a $6 million draw in the cash reserve during the year,
leaving $12 million available. The reserve facility has
not been used. The bonds have their own DSR of $13.7
million, which represents one year of interest. It remains
in place and has not been touched.
Rating Outlook
The developing outlook is consistent with the outlook for PREPA and incorporates
recent events that suggest positive momentum between PREPA and its creditors
toward reaching a consensual debt restructuring. The developing
outlook also recognizes that once AES PR gets through 2017, the
financial metrics should improve given the lower debt service after 2017.
That said, the developing outlook recognizes the somewhat fragile
nature of the restructuring agreement among PREPA and the creditors which,
in the end, could unravel, thereby increasing uncertainty
for PREPA and indirectly for AES PR.
Factors that Could Lead to an Upgrade
Upward pressure on the rating could develop if PREPA were to successfully
complete its restructuring and if its rating were to be revised several
notches upward and if AES PR is able to demonstrate DSCRs above 1.0x
on a sustainable basis.
Factors that Could Lead to a Downgrade
The Project's rating could face downward pressure if there were
to be additional operational problems at the Project resulting in lower
revenues and higher expenses, particularly given the elevated debt
service in 2017, resulting in another draw on the debt service reserve.
AES PR, an indirect wholly owned subsidiary of AES Corporation (AES:
Ba3, positive), owns and operates a 454 megawatt (MW) coal-fired
cogeneration facility located on the southeastern coast of Puerto Rico.
The project sells all of its firm energy and capacity pursuant to a 25-year
power purchase agreement to PREPA, a public corporation and governmental
agency of the Commonwealth of Puerto Rico. The project began operating
in 2002.
The principal methodology used in these ratings was Power Generation Projects
published in December 2012. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
