Electric provider for PREPA defaults on bonds

AES Puerto Rico, a firm that supplies about 21% of the electricity transmitted by the Puerto Rico Electric Power Authority, defaulted Thursday, missing an $18 million interest and principal payment on outstanding municipals it priced through a conduit in 2000.

In a notice to the Municipal Securities Rulemaking Board’s EMMA site on Friday, AES Puerto Rico said it had “entered into a temporary standstill and forbearance agreement with the trustee of the 2000 Series A Cogeneration Facility Revenue Bonds and certain bondholders to address an expected event of default arising from non-payment of interest and principal due June 1.”

The amount of the bond outstanding has been reported to be $145 million by Fitch Ratings and $142.6 million by AES-Puerto Rico. According to the Official Statement, the Series A bonds had $18 million due Thursday. The final maturity is in June 2026.

“AES Puerto Rico continues to work with its stakeholders to ensure its continuity of operations and to ensure the Puerto Rican people have access to reliable and affordable power,” the notice read.

The Puerto Rico, Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority served as the municipal conduit for the bonds in 2000. The original par value of the Series A bonds was $161.9 million. In addition, there were $33.1 million of taxable Series B bonds issued that have since been retired.

PREPA, which is currently in bankruptcy affecting more than $10 billion of debt, has continued to make its contractually required payments to AES PR. It is unclear what effect the default may have on PREPA or its bankruptcy.

The Puerto Rico Fiscal Agency and Financial Advisory Authority released a statement saying, “AES-PR has been in discussions with PREPA regarding its Power Purchase Operating Agreement with PREPA. Because the AES Bonds are publicly traded, and the substance of any discussions are confidential, FAFAA cannot comment.

“Neither FAFAA nor PREPA have been involved in negotiations between AES-PR and its bondholders,” FAFAA added.

At the heart of AES’s financial difficulty was a law passed by Puerto Rico’s government several years ago requiring AES to ship coal ash, a product of its generation, off the island. This led to higher costs than anticipated in its power purchase operating agreement with PREPA.

In March, a representative of AES Puerto Rico sent a letter to its bond trustee Deutsche Bank Trust Company Americas saying “due to changes in law and other unexpected conditions that materially increased the cash operating costs and materially decreased the project revenue — AES-PR anticipates that it will not have sufficient funds to pay principle and interest obligations on its Series A Bond Loans that are due and payable on June 1, 2023 … or future principle and interest payments unless and until a PPOA amendment is effectuated.”

Municipal Market Analytics Partner Matt Fabian said PREPA was able to give AES “a bit more liquidity earlier this year, but AES needs substantially more than that.”

“What then became an inevitable AES default and restructuring isn’t good for PREPA in the medium term, but PREPA doesn’t have the political or financial flexibility to bail AES out, especially as PREPA tries to rotate into renewable sources of generation,” Fabian said.

The AES Puerto Rico plant is in PREPA’s Easter Loop transmission line. The 484 MW plant is in Guayama, in Puerto Rico’s southeast. It burns coal and is the only electric power plant to do so in Puerto Rico. Following a local 2019 law, Puerto Rico has committed to ending use of coal-fired electricity by the end of 2027.

According to AES Puerto Rico’s unaudited first quarter financial statement, as of March 31 it had total current liabilities of $235 million and total current assets of $85 million. In the latter category it had $15.2 million in cash excluding restricted cash. It had a net income of $3.4 million in the first quarter.

“What impact will this have on PREPA operations is the real question,” said Puerto Rico Attorney John Mudd. “Will it file for Chapter 11? If so, will its contract with PREPA be modified?”

Deutsche Bank Trust Company Americas did not respond to a request for a comment. Brown & Wood was the bond counsel. It has since become part of Sidley Austin LLP and this firm did not respond to a request for a comment. Goldman Sachs was the underwriter and it also did not respond to a request for a comment. AES Puerto Rico made no comment beyond its EMMA posting.

The Puerto Rico Oversight Board did not respond to a request for a comment.

AES Puerto Rico is part of AES Corporation.