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