OREANDA-NEWS. 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