Fitch Downgrades AES Puerto Rico L.P.'s Senior Bonds to 'C'; Maintains Negative Watch

NEW YORK--()--Fitch Ratings has downgraded the following AES Puerto Rico L.P. (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority to 'C' from 'CC':

--$161.87 million cogeneration facility revenue bonds series A (tax-exempt bonds) due June 2026;

--$33.1 million cogeneration facility revenue bonds, series B (taxable bonds) due June 2022.

The bonds remain on Rating Watch Negative.

KEY RATING DRIVERS

AES PR's 'C' rating reflects Fitch's view of the credit quality of the Puerto Rico Electric Power Authority (PREPA), which we recently downgraded to 'C' from 'CC'. PREPA is the revenue counterparty under AES PR's power purchase agreement (PPA). PREPA's rating of 'C'/Rating Watch Negative constrains the rating of AES PR.

Revenue Risk: Weaker

Contracted Revenue Profile: The 25-year tolling-style PPA with a non-investment-grade counterparty effectively mitigates some risk of exposure to capacity price, energy margin, and dispatch risks throughout the debt term, subject to project availability and heat rates. However, concerns loom regarding the offtaker's ability to make future contractual payments.

Operation Risk: Weaker

Improving Operations: AES-PR has historically been susceptible to forced outages that have reduced availability and capacity payments. Further, the operating cost profile has exceeded original estimates. However, management has taken a proactive approach to limit future forced outages with encouraging initial results.

Supply Risk: Midrange

Manageable Supply Risk: Fuel supply risk is mitigated by a three-year, fixed-price fuel supply agreement sufficient to meet the project's expected fuel requirements through 2017. The short term of the agreement is mitigated by the historical precedence for renewal and liquid market for coal. Fuel price risk is mitigated by the tolling-style PPA, subject to heat rates. Ash inventory is actively managed by the project via the sale of its various ash products. AES PR's efforts have helped to offset near-term ash disposal concerns, but cash flow uncertainty is heightened without a permanent solution.

Debt Structure: Weaker

Weak Structural Features: The project's bonds are fixed-rate and mature within the PPA term, but have back-loaded amortization profiles. The equity distribution, leverage, and debt service reserve provisions are consistent with standard project finance structures. AES PR does not have O&M or major maintenance reserves, which increases the importance of operational stability and heightens the project's reliance on other sources of liquidity. Approximately 55% of the total debt outstanding, including unrated bank loans, is variable rate with over 80% synthetically fixed with investment-grade counterparties.

RATING SENSITIVITIES

Positive/Negative - Counterparty Rating: The rating is currently capped by PREPA's rating. A change in PREPA's long-term rating would likely affect the rating on AES Puerto Rico.

Positive - Operational Performance: Sustained improvements to plant availability or heat rate could enhance the long-term profile.

SUMMARY OF CREDIT

AES PR's downgrade reflects the rating of PREPA, which was downgraded to 'C'/Rating Watch Negative on June 27, 2016. As the key revenue counterparty, AES PR's credit quality constrains the project rating. Any rating change in PREPA's rating would likely lead to similar rating action for AES PR.

The downgrade and maintenance of the Negative Watch on PREPA reflect Fitch's view that a payment default or restructuring of PREPA's debt obligations is inevitable. For more commentary on Fitch's rating actions on PREPA, please see 'Fitch Downgrades Puerto Rico Electric Power Auth's Rev Bonds to 'C'; Negative Watch Maintained' (dated June 27, 2016), available on Fitch's website at 'www.fitchratings.com'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Thermal Power Projects (pub. 28 Jun 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883254

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008277

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008277

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Christopher Joassin
Director
+1-312-368-3166
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Christopher Joassin
Director
+1-312-368-3166
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com