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
