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  • Writer's pictureThe San Juan Daily Star

Moody’s downgrades AES PR bonds’ outlook to negative


The rating downgrade by Moody’s was prompted by the increased likelihood that AES Puerto Rico will not have sufficient liquidity reserves on hand to make its June 1 debt service payment on senior secured obligations.

By The Star Staff


One of Puerto Rico Electric Power Authority’s (PREPA) leading energy suppliers, AES Puerto Rico, is having financial difficulties.


AES Puerto Rico’s senior secured bonds have been downgraded by a credit rating agency because of the increased likelihood the energy provider may not be able to meet the June 1 debt service payment.


According to the March 7 press release from Moody’s Investors Service, the bonds were downgraded to Caa2 from Caa1.


“Moody’s downgraded today to Caa2 from Caa1 the rating assigned to AES Puerto Rico’s senior secured obligations, including approximately $144 million of senior secured bonds 2000 Series A issued by the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority (AFICA) on behalf of AES Puerto Rico,” the statement said. “The rating outlook was changed to negative from stable.”


The rating downgrade to Caa2 was prompted by the increased likelihood that AES Puerto Rico will not have sufficient liquidity reserves on hand to make its June 1 debt service payment on the bonds. Around $17.9 million of principal amortization is due on June 1. At the end of February, AES Puerto Rico had fully depleted its debt service reserve account for the 2000 Series A.


AES Puerto Rico’s liquidity situation has been further aggravated during 2022 by operating expense pressure which currently cannot be passed through to the Puerto Rico Electric Power Authority (PREPA) under the power purchase agreement (PPA). Debt service coverage ratios were already below 1.0x in 2021 and 2022 but liquidity reserves were sufficient to make debt service payments during those years, the credit rating agency said.


Operating expenses for the project have increased given that coal ash disposal has not been permitted on the island since 2020. Those higher costs are not reimbursable under the PPA. AES Puerto Rico has faced higher costs for coal ash disposal and entered into an Agremax Master Purchase and Sale Agreement with Keystone Properties LLC for the disposal of its coal ash on Feb. 19, 2019. The agreement extends through 2025. AES Puerto Rico had budgeted for residual waste disposal costs of around $26.3 million in 2022.


AES Puerto Rico also faced higher start-up costs in 2022 because the unit needed to be restarted several times due to transmission line problems. These are also not reimbursable under the PPA, the credit rating agency said.


Moreover, AES Puerto Rico will likely face higher costs for coal supply once its fuel supply agreement expires at the end of 2023 given current market prices. AES Puerto Rico continues to progress with the liner project which is required by the U.S. Environmental Protection Agency (EPA) to avoid further groundwater contamination from fly ash. Any fines or additional violation notices from the EPA would be credit negative.


“We understand that AES Puerto Rico is negotiating amendments to the PPA with PREPA to alleviate short-term and medium-term liquidity concerns,” the credit rating agency said. “However, it is highly probable that these amendments cannot be agreed upon in time for the 1 June debt service payment or may be insufficient to improve AES Puerto Rico’s liquidity situation on a sustainable basis.”


Other rating considerations include the value of AES Puerto Rico to PREPA as a reliable, cost-effective and important resource. While PREPA continues to operate its business in bankruptcy, the utility has honored its payment obligations under the PPA with AES Puerto Rico throughout the bankruptcy, a credit positive, indicating the importance of the resource for island reliability. The economic value of the plant is limited following expiration of the PPA given a ban on coal plants in Puerto Rico by Jan. 1, 2028.


Fiscal board requests additional info from AES affiliate on solar projects under Title V


In a separate development, the Financial Oversight and Management Board has asked Clean Flexible Energy, a San Juan-based affiliate of AES Puerto Rico, to submit additional information on three solar installations to be developed under Title V of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) according to a published letter.


It is one of the few times that Title V of PROMESA has been used to help develop a project. Title V of PROMESA seeks, in summary, to establish a process for the revitalization of the vital infrastructure of Puerto Rico through the establishment of expedited processes for the review and granting of permits of those projects considered “critical.” The project is evaluated by the so-called revitalization coordinator, which the oversight board currently does not have.


According to the March 6 letter sent by the oversight board’s general counsel,0 Jaime El Koury, to Clean Flexible Energy (CFE) President Jesús Bolinaga, on Nov. 8, 2022, CFE submitted documents to the board in connection with three projects: the Jobos Solar + BESS, the Salinas Solar + BESS; and the Naguabo A & B Solar.


“Since receiving this submission, the [oversight board] has been diligently reviewing CFE’s materials and analyzing the information in light of PROMESA Title V and other applicable provisions of PROMESA,” the letter notes.


For each of the three projects, the oversight board asked the developer to describe any additional infrastructure needed to bring generation online other than the bay (1 OHL feeder) and the cost of the additional bay (and any other required additions) included in the project cost.


The oversight board also asked for copies of any federal, state, local or other standards to comply in completing the projects, such as whether the projects are being built to withstand a category 5 hurricane in compliance with best practices and legal requirements.


The oversight board also asked CFE to provide supporting information and background to determine that the projects cumulatively will save approximately 1.75 barrels of fuel oil per megawatt-hour generated.


RFQ issued for new power plant


Meanwhile, the Puerto Rico Public-Private Partnerships Authority (P3A) and the Puerto Rico Electric Power Authority (PREPA) have issued a request for qualifications (RFQ) to companies and consortia interested in providing additional generation capacity through a new generation facility to be located at a suitable location in Puerto Rico under a long-term public-private partnership contract.


The aim of the project is to provide generation capacity with the purpose of improving resource adequacy on the island. Recent natural disasters further aggravated the current geographic supply-demand mismatch by destroying much of the transmission capability from south to north.


“The Project responds to the Puerto Rico Energy Bureau’s (PREB) order to PREPA to notify the P3A to commence a competitive procurement process for the establishment of a public-private partnership (PPP) for a Generation Facility,” said Fermín Fontanés Gómez, executive director of the P3A. “As we’re moving forward with the transformation and modernization of Puerto Rico’s energy system, this PPP supports the ongoing efforts of strengthening the reliability of power generation on the island.”


The project’s objectives are in line with 1) PREPA’s Integrated Resource Plan (IRP), 2) the PREB’s August 2022 order instructing PREPA to notify the P3A to commence the procurement process for the generation facility, and 3) LUMA Energy LLC’s (PREPA’s transmission and distribution system [T&D] operator) resource adequacy study.


Pursuant to the T&D operation and management (O&M) agreement, the T&D operator filed the results of its Resource Adequacy Study, which concluded that:


a. Puerto Rico has inadequate supply resources to ensure reasonable system reliability and meet expected demand, thereby raising the risk of load shedding outages beyond industry standards.


b. The probability that Puerto Rico’s existing generators would be unable to meet system load demand over the course of a year is nearly 100%.


c. Puerto Rico’s loss of load expectation (LOLE) for fiscal year 2023 is 8.81 days per year, which is 88 times higher than the utility industry benchmark of one day in 10 years (0.10 days per year). This means that, for 2023, it is expected that there will be 8.81 days per year (on average) on which electricity demand will not be met by the existing generation supply. This LOLE is significantly higher than other LOLE calculations on similar islands.


d. The risk of load-shedding outages is partially the result of inadequate reliable generation capacity due to PREPA’s unreliable and outdated generation plants.


The project contemplates PREPA entering into a long-term PPP contract with a private partner. The private partner will identify a suitable site location, design, permit, finance, construct, install, manage, operate and maintain the generation facility.

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