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7/13/2014 Fitch Ratings | Press Release

https://www.fitchratings.com/creditdesk/press_releases/detail.cfm?print=1&pr_id=798781

Fitch Affirms AES Puerto Rico L.P.'s Senior Bonds at 'BB'; Outlook Stable Ratings Endorsement Policy

06 Aug 2013 2:16 PM (EDT)

Fitch Ratings-Chicago-06 August 2013: Fitch Ratings affirms the 'BB' rating on AES Puerto Rico L.P.'s (AES-

PR) $161.87 million tax-exempt s enior cogeneration facility revenue bonds due 2026, and $33.1 m illion taxable

senior cogeneration facility revenue bonds due 2022. The Rating Outlook is Stable.

KEY RATING DRIVERS:

--Contracted Revenue Profile: The 25-year tolling-style power purchase agreement (PPA) with an investment-grade counterparty effectively mitigates capacity price, energy margin, and dispatch risks throughout the debt

term, subject to project availability and heat rates.Revenue Risk: Midrange

--Persistent Operational Iss ues: AES-PR has his torically been susceptible to forced outages that have reduced

availability and capacity payments. Management has taken a proactive approach to limit future forced outages

with encouraging ini tial resul ts. However, it remains unclear whether the project can achieve targetedavailability levels on a consis tent basis . Further, project heat rates continue to remain above the PPA fuel cos t

recovery threshold, though capital improvements and use of off-spec coal have lessened the gap.

Consequently, the operating cost profile has exceeded original es timates leading to reduced margins andlower debt service coverage ratios (DSCRs).

Operating Risk: Weaker

--Manageable Supply Risk: Fuel supply risk is mitigated by a two-year, fixed-price fuel supply agreementsufficient to meet the project's expected fuel requirements. Fitch believes the term of the supply agreement is

not a credit risk given the historical precedence for renewal and global, liquid m arket for coal. Fuel price risk is

mitigated by the tolling-s tyle PPA, subject to heat rates. Ash inventory is actively managed by the project via thesale of its AGREMAX product and raw, dry ash. Fitch believes that AES-PR's efforts have helped to offset near-

term ash dis posal concerns, but cash flow uncertainty is heightened without a permanent solution.

Supply Risk: Midrange

--Weaker Debt Structure: 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

generally consistent with similarly rated thermal power projects. AES-PR does not have O&M and majormaintenance reserves, which increases the importance of operational stability and heightens the project's

reliance on other sources of liquidity. Fitch recognizes that approximately 55% of the total debt outstanding,

including unrated bank loans, is variable rate with over 80% synthetically fixed with investment-grade

counterparties.Debt Structure: Weaker

--Speculative-Grade Financial Profile: The Fitch rating case results in average DSCRs of over 1.15x during thenext five years, consis tent with the ass igned rating category, based on s tressed 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 1.05x. Fitch notes that thiscoincides with the principal amortization period of the senior bonds and exposes bondholders to longer term

operational risks.

RATING SENSITIVITIES:
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--Operational Performance: Demonstrated ability or inability to im prove and sus tain equivalent availability

factors above 90% or heat rate excursions for fuel cost recovery that changes the long-term DSCR profile could

change the rating.

--Operating Costs: Consistently higher or lower cost profile from incremental maintenance, ash management,

and fuel expenses/savings resulting in a material change in financial flexibility.

SECURITY:

All project revenues , controlled bank accounts, and security interes t in the contract rights of AES-PR.

CREDIT SUMMARY:

The 12-month rolling average equivalent availability factor generally remained slightly below or at the 90% PPA

requirement for full capacity payments since the las t review. However, Fitch recognizes that management's

corrective and preventative maintenance initiatives have borne encouraging results. The repairs have resultedin a reduction in the AES-PR's year-to-date forced outage rate to 3.7% from a historical rate in excess of 10%

and a heat rate improvement of approximately 130 Btu/kWh.

The project's 2012 DSCR of 1.2x is generally consis tent with the Fitch rating case. This underperformance isdue to availability below and heat rates above Fitch base case expectations, as well as higher than anticipated

maintenance and interest costs. Fitch notes that incremental maintenance costs were incurred to replace at-risk boiler tubes, among other repairs, that should help mitigate operational issues associated with theoriginal project design. Fitch expects the impact of operational issues and higher costs to improve when all

preventative and corrective maintenance is completed.

Fitch needs to observe several years of improved operations, with a corresponding increase in the Fitch ratingcase DSCR profile to at least 1.30x, for a positive rating action. Conversely, an inability to improve the operating

and cost profiles over the next few years, resulting in Fitch rating case DSCRs remaining below 1.15x, may

lead to a negative rating action. Fitch believes that AES-PR's ability to improve the DSCR profile to a levelconsis tent with a higher rating will be a challenge, but views the current and expected future operational

improvements as m itigants to further downgrades.

AES-PR is a special purpos e entity that is an indirect wholly owned facility of AES Corporation (rated 'BB-',Stable Outlook). 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-', Stable Outlook)under the terms of a 25-year PPA, which is a m odified tolling agreement that reimburses fuel, subject to heat

rate requirements, and certain other operating costs.

Contact:

Primary Analyst

Dino Kritikos

Director+1-312-368-3150

Fitch Ratings, Inc.

70 West Madison StreetChicago, IL 60602

Secondary Analyst

Yvette DennisDirector

+1-212-908-0668

Committee ChairpersonGreg Remec

Senior Director

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+1-312-606-2339

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: [email protected].

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);--'Rating Criteria for Thermal Power Projects' (June 17, 2013).

Applicable Criteria and Related Research:Rating Criteria for Infrastructure and Project Finance

Rating Criteria for Thermal Power Projects

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06 Aug 2013 Fitch