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Rating Action:

Moody's downgrades AES Puerto Rico to B3: outlook negative

02 Jul 2014

Approximately $194 million of secured bonds affected

New York, July 02, 2014 -- Moody's Investors Service downgraded the rating of 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) to B3 from Ba2. Today's rating action follows yesterday's downgrades of Puerto Rico Electric Power Authority (PREPA) to Caa2, RUR-down) and the Commonwealth of Puerto Rico (Commonwealth) to B2, negative. The outlook for AES PR is negative.

RATINGS RATIONALE

AES PR's revenues and cash flows are entirely dependent upon the contractual sale of electricity to PREPA and the utility's willingness and ability to pay for that energy. On June 26th and subsequently on July 1st we downgraded PREPA to Ba3 and then to Caa2 and placed the rating under review for possible downgrade. Both rating actions incorporated PREPA's immediate liquidity strain along with ongoing operational challenges include negative free cash flow, high electricity rates, high rates of non-payment, growing receivables balances and the need to fund a sizeable construction program. The July 1st rating action followed the signing into law of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (Recovery Act), which provides a framework for public entities such as PREPA to restructure their debts. The Recovery Act is intended to allow an orderly restructuring process while ensuring the continuity of essential services, such as the provision of electricity, without reliance on financial support from the Commonwealth or the Government Development Bank for Puerto Rico (B3 negative). PREPA's Caa2 rating reflects our view that, given its current cash strain and the July and August maturities of its bank facilities, the utility may seek to utilize the new law in the near term.

The two notch rating differential between AES PR and PREPA recognizes the priority position of PREPA's contractual payments to AES PR as an operating expense, and considers 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 the new legislation has language which would allow parties to reject contracts, we believe that AES PR's unique position as a coal-fired plant on the island and a cost-effective alternative for PREPA relative to fuel oil generated power (cost is currently about $95 / MWh), positions the asset well and reduces the probability that PREPA would seek to reject the contract. The rating also considers the secured position of the AES PR's project lenders and the additional protections, such as debt service reserves, provided by the project financing structure.

AES PR's own operational and financial performance continues to be consistent with our expectations, and on the basis of earned revenue, we expect AES PR should be able to demonstrate DSCR's that are above 1.30x. However, we understand that given PREPA's liquidity challenges the amount and timing of payments from PREPA have been somewhat erratic, periodically impacting cash flow metrics. It is possible payment delays may widen with PREPA's continuing liquidity strain. For the twelve months ending February 2014, AES PR calculated a cash based DSCR of 1.42x; and for the twelve months ending February 2015, projects cash based ratio of 1.30x.

The negative outlook reflects the potential for additional growth in PREPA receivables and uncertainty with regards to the process and timing surrounding the newly passed Recovery Act. Our rating incorporates an expectation that should PREPA seek to restructure under Chapter 3 of the Recovery Act, it would not seek to reject the AES PR power purchase agreement. If however, PREPA were to attempt to reject the contract with AES PR subsequent to a Chapter 3 filing under the Recovery Act, there would likely be downward pressure on the rating. There is also uncertainty about how PREPA might utilize the Recovery Act. There could be delays and administrative costs associated with PREPA's petition for relief under this act that could impact timeliness of payment under the contract even if PREPA does not seek outright rejection of the contract. Downward pressure on the rating could also develop if payment delays, operating difficulties or if increases in unrecovered operating and/or capital costs, cause debt service coverage ratios to fall below 1.10x for an extended period.

In light of the negative outlook, the rating is not likely to be revised upward over the near-to-medium term. In the event the rating outlook at PREPA stabilized, the outlook for AES PR would also likely be revised to stable. Longer term, upward pressure on the rating could develop if the rating of PREPA were to be revised upward and if the project is able to demonstrate debt service coverage ratios above 1.3x on a sustainable basis.

For additional detail on AES PR please refer to our credit opinion posted on moodys.com.

The principal methodology used in this rating was Power Generation Projects published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

AES PR, an indirect wholly owned subsidiary of AES Corporation (AES: Ba3 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. The project began operating in 2002.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Laura J.K. Schumacher
VP - Senior Credit Officer
Corporate 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

Chee Mee Hu
MD - Project Finance
Corporate 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

Moody's downgrades AES Puerto Rico to B3: outlook negative
No Related Data.
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