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Rating Action:

Moody's downgrades AES Puerto Rico to Caa1 from B3: outlook revised to negative from developing

18 Jul 2017

Approximately $194 million of secured bonds affected

New York, July 18, 2017 -- Moody's Investors Service downgraded the senior secured rating, including approximately $194 million of senior 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) to Caa1 from B3. Today's rating action reflects the July 2nd filing by Puerto Rico Electric Power Authority (PREPA; Ca negative) of a petition in US District Court for relief under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The rating outlook for AES PR is revised to negative from developing.

RATINGS RATIONALE

The rating action reflects the heightened default risk for AES PR owing to PREPA's decision to file for bankruptcy protection under Title III, which gives PREPA the ability to reject contracts, including the power purchase agreement (PPA) between PREPA and AES PR. While we do not expect PREPA to pursue this option owing to the cost competitiveness of the resource, the fact that PREPA now has the ability to reject contracts increases default risk for AES PR bondholders. Prior to the filing, we had expected PREPA to implement its restructuring plans as a Pre-existing Voluntary Agreement through Title VI of PROMESA (Creditor Collective Action), which specifically does not allow for the rejection of contracts.

While today's rating action recognizes the heightened default risk for the Project's bondholders, it also acknowledges several compelling factors that support PREPA affirming the AES PR contract. AES PR is among PREPA's most cost-effective generating resources, which benefits from the use of Colombia-sourced coal to fire the plant resulting in the all-in costs for PREPA being quite attractive (at 8.5 to 9.0 cents/kwh) relative to fuel oil generated, owned resources or other alternatives available to PREPA. Also, certain terms of the AES PR PPA are attractive to PREPA from a cost and flexibility perspective as the failure of AES PR to reach availability requirements enables PREPA to reduce the amount paid for capacity. Additionally, under the PPA, PREPA compensates 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. Moreover, capacity payments under the PPA will decline materially beginning in 2020 (by 23%) and will decline again in 2022 (by an additional 22%), making the asset that much more attractive to PREPA. The rating considers the protections provided to secured project lenders, given the collateral value, along with the amortizing debt structure as well as additional protections, such as debt service reserves and a cash flow waterfall, provided by the project financing structure. We further note that payments to AES PR have a priority position as a PREPA operating expense, strengthened by the strategic importance and essential service of the asset as it provided 16% of the island's generation during 2016. Consistent with past practices, we understand that PREPA continues to pay AES PR for power, albeit with some delays, and intends to fully repay AES PR all amounts due ($44 million) at the time of the PREPA filing.

Moody's notes that while the Project's underlying financial and operating performance in 2016 were in line with expectations, financial results were weaker than in prior years requiring a draw on the debt service reserve (DSR) to cover scheduled debt service in 2016. This year, the Project's financial performance also faces some challenges as scheduled debt service during 2017 is elevated. However, financial performance is expected to improve in 2018 and beyond owing primarily to lower annual debt service.

AES PR's operating and financial performance during 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 in 2016. For the full year 2016, the rolling 12-month availability was 84.3%, resulting in AES PR not receiving its full capacity payment from PREPA.

During 2016, the Project was also impacted by a one-time payment made as part of a litigation settlement, and by another outage, albeit a smaller one, during May 2016 owing to a tube leak. The Borrower also 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 being 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) for 2016 to be less than 1.0x. As alluded to above, 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. Moody's notes 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 year.

Moody's expects the Project's operating performance to improve in 2017. Management expects availability to be 90% in 2017, which is at the required minimum in the PPA, enabling the Project to receive its full capacity payment under the PPA. Availability for the 12 months through May 2017 (which excludes the impact of the outage in the last months of 2015) was 92.3%. Further, the one-time litigation payment will not recur in 2017. However, we expect the Project's DSCR for 2017 to be only about 1.0x owing to substantially higher debt service requirements ($18 million higher than 2016) 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. 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.

OUTLOOK

The negative outlook is consistent with the outlook for PREPA and incorporates recent events that suggest a high degree of uncertainty concerning the timing and the terms of any PREPA restructuring. While we believe that AES PR is a cost effective source of power for PREPA, and that the PPA between AES PR and PREPA will remain in place, PREPA's filing to restructure is in unchartered waters with continued uncertainty about the manner in which events will unfold. Also, given the liqduity position at PREPA and the weak economy across the commonwealth, the timeliness of payments under the contract remain an ongoing concern even if PREPA does not seek to reject the contract.

WHAT COULD CHANGE THE RATING -- UP

In light of the negative outlook, the rating is not expected to move upward over the near-to-medium term. The rating outlook could stabilize if PREPA's restructuring is announced, and it is clear that the PPA with AES PR will remain in place.

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. The rating could also face negative action 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: Ba2, 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 (Caa3 negative). The Project began operating in 2002.

The principal methodology used in these ratings was Power Generation Projects published in May 2017. 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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