TEXT-Fitch cuts AES Puerto Rico senior bonds to 'BB'
Aug 29 - Fitch Ratings has downgraded AES Puerto Rico L.P.'s (AES-PR) $161.87 million tax-exempt senior cogeneration facility revenue bonds due 2026, and $33.1 million taxable senior cogeneration facility revenue bonds due 2022 to 'BB' from 'BB+'. The Rating Outlook is revised to Stable from Negative. The downgrade to 'BB' reflects sustained performance issues despite management's efforts, increased operating costs related to corrective maintenance and repairs to address forced outages, and an inability to establish long-term, contracted ash management arrangements. The Stable Outlook reflects Fitch's expectation that the project will be able to continue performing at levels consistent with the revised rating. KEY RATING DRIVERS --Revenue Stability: The 25-year tolling-style power purchase agreement (PPA) with an investment-grade counterparty effectively mitigates energy and fuel price risk through the debt term. AES-PR has recently executed an additional sales agreement with the off-taker for up to 14 megawatts. Management believes that this will result in approximately $4 million in additional revenue annually. However, failure to consistently meet PPA availability requirements has reduced fixed capacity payments. --Operational Challenges: AES-PR has been susceptible to forced outages that have reduced availability and capacity payments. Management has taken a proactive approach to limiting future forced outages by planning for and making corrective repairs and establishing on-going monitoring and testing. However, outages have persisted and it remains unclear whether completed and scheduled repairs will be sufficient to achieve targeted availability levels on a consistent basis. --Higher Operating Cost Profile: The project's operating costs continue to exceed original projections due to corrective and preventative maintenance and repairs, as well as increased coal prices beginning in 2013. Fitch notes that the project's heat rate has consistently exceeded the PPA contracted heat rate for fuel recovery, but the planned use of an alternative type of coal under a new supply arrangement is expected to improve the fuel cost recovery gap. --Partial Ash Management Solution: AES-PR continues to actively manage its ash inventory via the sale of its AGREMAX product and raw, dry ash for the construction of rural roads, landfill covers, and waste water stabilization. Currently, the majority of sales are on a project-by-project basis, but management indicated that there has been strong interest from waste management companies for long-term dry ash supply contracts. Fitch believes that AES-PR's efforts have helped to offset near-term concerns, but cash flow uncertainty is increased without a permanent solution. WHAT COULD TRIGGER A RATING ACTION: --Operational Performance: Demonstrated ability or inability to improve and sustain equivalent availability factors above 90% or heat rate excursions for fuel cost recovery; --Operating Costs: Consistently higher or lower cost profile from incremental maintenance, ash management, and fuel expenses/savings resulting in a material change in the financial cushion forecasted in the Fitch rating case. SECURITY: All project revenues, controlled bank accounts, and security interest in the contract rights of AES-PR. CREDIT SUMMARY: The 12-month rolling average equivalent availability factor (EAF) has generally been slightly below or at the 90% PPA requirement for full capacity payments over the past year. Fitch believes that management's emphasis on forward-looking initiatives to reduce forced outages should help improve the project's time offline, but the long-term improvement and stabilization of the EAF above the PPA requirements remains uncertain. Favorably, the project is expected to remain the lowest cost and largest generator in Puerto Rico, maintaining its important role serving a dedicated island system. The Fitch rating case forecasts average debt service coverage ratios (DSCRs) of over 1.2x during the next five years, consistent with the assigned rating category, based on stressed levels of availability, costs, heat rates, and interest rates. However, the DSCR profile becomes considerably weaker after 2020 when the contractual capacity payment is reduced, resulting in coverage of approximately 1.10x. Fitch notes that this coincides with the principal amortization period of the senior bonds and exposes bondholders to longer term operational risks. AES-PR is a special purpose entity that is an indirect wholly owned facility of AES Corporation (rated 'BB-', Stable Outlook by Fitch). The project was formed in 1994 to own and operate a net 454.3 megawatt coal-fired circulating fluidized bed combustion power plant in Guayama, Puerto Rico. The project's main revenue sources are capacity and energy sales to Puerto Rico Electric Power Authority (rated 'BBB+', Negative Outlook) under the terms of a 25-year PPA, which is a modified tolling agreement that reimburses fuel (subject to heat rate requirements) and certain other operating costs. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012); --'Rating Criteria for Thermal Power Projects' (June 18, 2012). Applicable Criteria and Related Research: Rating Criteria for Infrastructure and Project Finance Rating Criteria for Thermal Power Projects
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