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Rating Action:

Moody's affirms Caa1 rating of AES Puerto Rico senior secured bonds; outlook revised to stable

24 Aug 2018

Approximately $194 million of secured bonds affected

New York, August 24, 2018 -- Moody's Investors Service affirmed the Caa1 rating on approximately $194 million of secured bonds issued by the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority on behalf of AES Puerto Rico, L.P (AES PR or Project). As part of this rating affirmation, the rating outlook was revised to stable from negative.

Outlook Actions:

..Issuer: AES Puerto Rico, L.P.

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: AES Puerto Rico, L.P.

....Senior Secured Regular Bond/Debenture, Affirmed Caa1

..Issuer: P.R. Ind Tour Ed Med & Env Ctl Facs Fin Auth

....Senior Secured Revenue Bonds, Affirmed Caa1

RATINGS RATIONALE

Today's rating action reflects the improved prospects for AES PR owing to the re-establishment of regular payments from Puerto Rico Electric Power Authority (PREPA; Ca negative), the Project's off-taker and sole source of revenue. The Project has received more than $200 million in payments from PREPA since December 2017, pursuant to its long-term power purchase agreement (PPA) with the utility. This development is positive for AES PR bondholders and comes after several months of non-payment by PREPA subsequent to Hurricane Maria, which hit northern and eastern Puerto Rico in September 2017, causing widespread damage to the island's power grid. We understand that PREPA is current on payment obligations with AES PR.

The AES PR plant did not itself sustain significant direct damage from Maria, given its location on the south side of the island, and both units at the plant were brought back on line relatively soon after the storm -- in October 2017 -- thereby making the plant available for dispatch by PREPA and entitling AES PR to claim its capacity payment under the PPA. However, the plant was not able to deliver power to PREPA after the storm because of downed transmission lines that connect AES PR to the electric grid. In the aftermath of the hurricane, PREPA worked to restore the two transmission lines that connect the AES PR plant with the rest of the island. The first of the lines was restored in December 2017. The second line was not fully repaired until April 2018. Since then, the AES PR plant has been running at close to full capacity as well as at a nearly 100% availability factor, underscoring the importance of the plant to system reliability on the island.

PREPA had stopped making any payments to AES PR from September right after the storm until December 2017. This nearly four-month delay in payment put stress on the Project's liquidity, particularly since the Project had large debt maturities during 2017. Specifically, AES PR had scheduled debt service due on its senior secured bonds of $6.8 million on December 1, 2018, as well as $32.2 million due under its senior secured bank facilities on November 30, 2018. The $32.2 million payment due under the bank facilities included a large balloon principal payment on a term loan as well as the final payment under a drawn working capital facility. AES PR made its scheduled debt service payment of $6.8 million due to its bondholders in December from its bond debt service reserve account. And while AES PR had the internal resources to make the $32.2 million bank debt service payment, AES PR and the banks signed a forbearance agreement to extend the maturity date on the bank facilities to March 23, 2018, in an effort to conserve its internal liquidity owing to PREPA's weak and highly uncertain liquidity profile.

Since December 2017, PREPA has paid a total of about $209.1 million to AES PR, with the Project using a portion of these proceeds to make the final principal payments on the term loan and the working capital facility before the March 23rd maturity date. At this time, AES PR is current on all of its debt obligations.

The rating action further recognizes the improved liquidity at AES PR, which consists of fully funded debt service reserves and a more robust operating cash position. The bond debt service reserve account currently has $13.7 million, an amount sufficient to cover the next two bond debt service payments of $6.8 million each due December 1, 2018 and June 1, 2019. In addition, according to management, there is enough cash in the bank debt service reserve to cover the next two bank debt service payments. Additionally, AES PR is funding the required bond debt service payment account and bank debt service payment account on a monthly basis as required under the respective indentures, which helps to ensure that debt service can be satisfied without touching either of the debt service reserves. Also, cash in the operating accounts is sufficient to cover operating expenses (coal fuel payments, operations and maintenance, payroll, etc.) through November 2018 even if PREPA makes no further payments. Our expectation, however, is that AES PR will continue to receive payments from PREPA for delivered power and capacity, albeit perhaps late, as the AES PR plant remains one of the most cost effective generation resources on the island. In that regard and in line with the stable outlook, our expectation is that the Project will have enough money to make the debt service payments without touching the debt service reserves and will be able to continue to pay debt service and fund operations on a going forward basis.

The rating action also considers our expectations of improved economics and financial metrics at the Project. We calculate that the debt service coverage ratio (DSCR) will improve to the range of 1.4x-2.0x on a proforma basis over the next several years from about 1.0x in 2017, even with no growth in cash flow. Total debt service (bond and bank) is scheduled to decline to about $40 million in 2018 from over $100 million in 2017, enabling AES PR to comfortably meet this year's annual debt service. While debt service will rise again to about $72 million in 2022 as the bonds begin to amortize, we calculate that that the DSCR will remain above 1.0x even with the scheduled 2020 decline in the capacity payment from PREPA to AES PR under the PPA.

Having said that, the Caa1 rating affirmation incorporates a number of uncertainties for AES PR. For one, PREPA, the PPA contract counterparty, remains in bankruptcy. Although PREPA recently announced that it had reached a preliminary restructuring agreement with most of its bondholders, there remains uncertainty about the timing and final terms of PREPA's bankruptcy restructuring. Moreover, PREPA's liquidity remains weak, and as such, there remains ongoing uncertainty about PREPA's ability to pay its obligations on a sustained and timely basis.

In addition, Title III of the Puerto Rico Oversight, Management and Economic Stabilization Act (PROMESA) gives PREPA the ability to reject contracts, including the PPA between PREPA and AES PR. While this risk cannot be ruled out, we also believe that the competitiveness of AES PR may limit the degree to which PREPA pursues this option. This is particularly the case given the decline in the capacity payment under the PPA that begins in 2020, which ultimately enhances the asset's competitiveness. Moody's notes that the PREPA Fiscal Plan, which was approved by the PROMESA Oversight Board on April 19, 2018, lists contract renegotiations as one of the ways for PREPA to lower the cost of fuel and purchased power (along with generation efficiency/flexibility investment, dispatch optimization, preventative maintenance, improving fuel mix and new generation resource procurement).

For these reasons, the Caa1 rating remains three notches above the rating of the off-taker. While the probability of default risk remains heightened at AES PR owing to the weakness of the off-taker, the Caa1 rating incorporates a high degree of recovery for bondholders in the event that a AES PR default occurred. Other secondary considerations include the strength of the collateral package that includes a security interest in all of AES PR's rights, title and interest in the Project, including contracts, revenues, personal property, along with the various reserves.

OUTLOOK

The stable outlook reflects the improved prospects for AES PR bondholders from recent events, such as the re-establishment of more regular payments from PREPA and the Project's improved liquidity. In addition, the stable outlook reflects the declining debt service, which increases the ability for AES PR to cover its obligations on a going forward basis barring any unexpected developments. We believe that the AES PR plant is a cost effective source of power for PREPA, and as such believe that the PPA between AES PR and PREPA is expected to remain materially in place.

WHAT COULD CHANGE THE RATING -- UP

The rating could face upward pressure if AES PR's economics improve and PREPA continues to make regular payments on a sustained basis. The rating could also go up if the PREPA rating goes up and the utility makes further progress on executing a comprehensive restructuring, and it is clear that the PPA with AES PR will remain largely intact under Title III once PREPA emerges from its restructuring.

WHAT COULD CHANGE THE RATING - DOWN

The Project's rating could face downward pressure if PREPA were actually to take steps to reject the AES PR PPA in its entirety. The rating could also face negative action if there were to be operational problems at the Project resulting in lower revenues and higher expenses, resulting in weaker financial metrics.

AES PR, an indirect wholly owned subsidiary of The AES Corporation (AES: Ba1, stable), 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 the PREPA, a public corporation and governmental agency of the Commonwealth of Puerto Rico (Ca negative). The Project began operating in 2002.

The principal methodology used in these ratings was Power Generation Projects published in June 2018. 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: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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