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Global Credit Research - 23 Aug 2010
$195 million debt affected
New York, August 23, 2010 -- Moody's Investors Service has affirmed the Baa3 rating on AES Puerto
Rico L.P.'s (AES PR) $195 million of senior
secured bonds outstanding and revised the outlook to negative.
The bonds were issued on behalf of AES PR by the Puerto Rico Industrial,
Tourist, Educational, Medical, and Environmental Control
Facilities Financing Authority. Proceeds of the bonds were lent
to AES PR to help finance the construction of its 454 megawatt (MW) coal-fired
cogeneration facility. The bonds are secured by loan payments from
AES Puerto Rico equal to debt service on the bonds.
The Baa3 rating reflects the cash flow stability provided by the project's
power sales agreement for the full output of the plant with the Puerto
Rico Electric Power Authority (PREPA, rated A3), which provides
for the transfer of most fuel cost risk to the offtaker, and the
essentiality of the plant to Puerto Rico's resource portfolio.
The negative outlook considers the expected deterioration of the project's
financial performance in the coming years, driven by steady increases
in scheduled debt service, higher than expected operating and maintenance
costs and capital expenditures, and operational problems related
to the project's inability to achieve the heat rate performance
requirements in its offtake agreement.
The rating will come under downward rating pressure unless the project
is able to reduce its O&M and capex costs and improve its operating
performance sufficiently to maintain a minimum of 1.5x debt service
coverage going forward. Given the negative outlook, the rating
is unlikely to be upgraded in the near to medium term. However,
the outlook could be stabilized if the project successfully achieves its
forecast coverage level of 1.6x in 2011 and demonstrates its ability
to maintain a minimum debt service coverage ratio of 1.5x going
In 2009, debt service coverage was just 1.36x, down
from an average of 1.7x over the previous four years. Coverage
is expected to remain slightly below 1.5x this year. Next
year it is projected to rebound to 1.6x, but management forecasts
that it will fall to 1.4x by 2017 and if the project is unable
to achieve some of the assumed improvements upon which management's
forecast is based, Moody's believes that coverage could fall
as low as 1.33x.
Debt service is projected to increase to $84 million in 2017 from
just $66 million in 2010, an increase of 27%.
This far outstrips the increase in scheduled capacity payments from PREPA,
which grow by just 8%, or $8 million, to $101
million during this period. The capacity payments account for approximately
85% of the cash flow available for debt service. As a result,
management forecasts that debt service coverage will fall to 1.4x
by 2017. This forecast assumes a reduction of $5 million
in annual operating and maintenance expenditures (including capex) and
an increase of $700,000 in the margin of variable O&M
payments over related costs going forward. If they are unable to
achieve these results, coverage could fall as low as 1.33x
Between 2005 and 2008, average debt service coverage of 1.7x
was only slightly below the intial forecast of 1.8x. However,
cash flow available for debt service averaged just $105 million
over this time period, well below the initial forecast of $128
mm. This was largely offset by lower than expected debt service,
which averaged just $62 million, or $10 million lower
than initially forecast.
Cash flows have been weaker than forecast at least in part because of
higher than expected capital expenditures and ash management, dredging,
and insurance costs, as well as under recovery of fuel costs related
to the plant's inability to meet the heat rate guarantees in its power
sales agreement. The financial impact of this last concern has
been increasing in recent years due to steady growth in the project's
fuel costs, which have risen from $21/MWh in 2005 to $35/MWh
in 2009. Recent capital improvements are expected to result in
an improvement in the project's heat rate and a $1 million
improvement to earnings according to management. A recent renegotiation
of the coal supply contract is expected to result in an additional $1.5
million boost to the bottom line. However, these improvements
may be offset by an increase in the project's ash management costs
that could total $5 million this year, though management
hopes to bring this down to $1.3 million by 2014.
Management also anticipates a $2.5-$3 million
annual reduction in taxes beginning in 2016 thanks to a recently negotiated
amendment to the project's tax agreement with the government that
is still awaiting final approval. It is unclear whether these expected
changes have been incorporated into the forecast.
The project's lower than expected debt service was due to lower
than expected interest expense related to the project's term loans,
of which it currently has $444 million outstanding. While
less than 20% of these debt obligations by par value are fixed
rate, over 80% of the project's variable rate exposure
is currently hedged and less than 1% of the project's 2010
debt service requirements consist of unhedged interest expense.
This figure is expected to rise to 7.25% by 2017,
but it remains reasonable in Moody's opinion. As a result,
Moody's believes it is highly unlikely that the project's
debt service requirements, which are expected to increase considerably
in coming years, will remain significantly below expectations.
The decline in debt service coverage in 2009 was largely attributable
to a late payment by PREPA of $11 million. This payment
was subsequently received and PREPA is now current on its payments.
Adjusted for this, coverage was a considerably stronger 1.54x.
While even the adjusted coverage figure remained below recent historical
averages, this was primarily the result of significant one-time
capital expenditures. In 2010, coverage is projected to remain
slightly below 1.5x due to a significant forced outage on one of
the two units that occurred this spring and lasted a month and a half
together with a planned outage this fall on the other unit. This
is expected to result in a $15 million reduction in capacity payments
this year and a $6 million increase in O&M expense.
In addition, the company incurred a approximately $3 million
of capex associated with a refurbishment of its cooling tower.
The last rating action on AES Puerto Rico was on May 31, 2006 when
the Baa3 rating was affirmed.
The principal methodology used in rating this issuer was Moody's Power
Generation Projects, published in December 2008 and available on
www.moodys.com in the Ratings Methodologies subdirectory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Ratings Methodologies subdirectory on Moody's website.
AES Puerto Rico, L.P. (AES PR or the project),
an indirect wholly owned subsidiary of AES Corp. (B1 corporate
family rating), 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 (PPA) to the Puerto Rico Electric Power Authority,
a public corporation and governmental agency of the Commonwealth of Puerto
Chee Mee Hu
MD - Project Finance
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's revises AES Puerto Rico's outlook to negative; Baa3 rating affirmed
250 Greenwich Street
New York, NY 10007
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