OREANDA-NEWS. Fitch Ratings has maintained the following AES Puerto Rico L.P. (AES PR) securities issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority on Rating Watch Negative:

--\$161.87 million cogeneration facility revenue bonds, series A (tax-exempt bonds) due June 2026 at 'CC';
--\$33.1 million cogeneration facility revenue bonds, series B (taxable bonds) due June 2022 at 'CC'.

KEY RATING DRIVERS

The 'CC' rating reflects Fitch's view of the credit quality of the Puerto Rico Electric Power Authority (PREPA). PREPA is the revenue counterparty under AES PR's power purchase agreement. PREPA's 'CC' rating and Negative Watch constrain the rating of AES PR.

Contracted Revenue Profile - Revenue Risk: Weaker
The 25-year tolling-style power purchase agreement (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.

Improving Operations - Operation Risk: Weaker
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.

Manageable Supply Risk - Supply Risk: Midrange
Fuel supply risk is mitigated by a three-year, fixed-price fuel supply agreement sufficient to meet the project's expected fuel requirements. 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.

Weaker Debt Structure - Debt Structure: Weaker
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 impact the rating on AES Puerto Rico.

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

TRANSACTION SUMMARY

PREPA Developments: Since August 2014, PREPA and its creditors have maintained forbearance agreements to provide temporary relief related to PREPA's maturing bank lines of credit to allow for additional time for negotiations with creditors. The current agreements extend the forbearance to April 30, 2015, though the lenders have the right to terminate the forbearance at any time, with written notice to PREPA. Negotiations are ongoing though a full comprehensive public plan is not anticipated until July 15, 2015. Fitch believes that a restructuring of PREPA's debt obligations remains likely and has therefore maintained the rating of PREPA's power revenue bonds at 'CC' with a Negative Watch.

At AES PR, plant operations have improved substantially and the 2014 effective forced outage rate of 1.2% was the best in the plant's history. Average heat rates have also demonstrated considerable stability in recent quarters. The sponsor attributes improved performance to a renewed commitment to fund major capital expenditures since 2012.

The project has also added new agreements for fuel supply and ash management that support cash flow stability. The fuel supply agreement extends through 2017, offers more favorable and stable pricing, and provides more flexible payment terms. The ash management agreements promote the disposal of AES PR's ash products to on-island landfills for beneficial use, and are expected to be sufficient to cover all the project's ash management needs.