Fitch Ratings has assigned a 'BBB+' rating to Puerto Rico Electric Power Authority (PREPA) as follows:
--Approximately $200 million series DDD power revenue bonds 'BBB+'.
The bonds are scheduled to price during the week of Sept 27, 2010 and will refund certain outstanding bonds for savings.
In addition, Fitch affirms the following rating:
--$7.6 billion power revenue bonds at 'BBB+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'BBB+' rating reflects PREPA's weakened financial profile that
appears to have stabilized as a result of management's efforts to reduce
government accounts receivables, cut operating costs and improve
liquidity.
--Concerns are centered on the system's above average
leverage levels and increasing debt service schedule that relies on
operating efficiencies to increase net revenues and maintain 1.50 times
(x) debt service coverage.
--Positively, electricity sales and
expenditure cuts in 2010 were both better than initial projections and
further improvements appear to be attainable.
--PREPA's high
percentage of accounts receivable (25%) pressures its liquidity position
and remained unchanged from 2009 to 2010; however, government
receivables declined 21% and now account for $373 million of $1 billion
in total gross accounts receivable.
--The debt issued over the past
six months was used to retire certain lines of credit. As of July 31,
2010, PREPA had liquidity of approximately $186 million including cash
on hand and a line of credit for fuel purchases. Additionally, PREPA has
available lines of credit of approximately $175 million of which $150
million is available to be used to cover collateral requirements and the
remainder for capital improvements.
--Fitch also views as a concern
the basis swap PREPA entered into in 2008. Management indicated that the
swap had a present value benefit of $81 million and that the swap net
accruals are currently performing well. The current mark to market does
not require collateral posting at this time.
--PREPA continuously
evaluates the appropriateness of the rate structure. Currently, PREPA
does not anticipate increasing base rates.
KEY CREDIT DRIVERS:
--The current rating assumes ongoing success from the financial strategy
put in place last year and continued improvement in financial
performance, including reducing accounts receivables and improving net
assets.
--Additional fuel diversity and long term cost reduction
have the potential to strengthen financial metrics and limit rate
volatility.
SECURITY:
The bonds are secured by a senior lien on net revenues of the electric system.
CREDIT SUMMARY:
PREPA is one of the largest public power systems in the U.S., and its credit strength is founded on its position as the sole provider of power to the commonwealth of Puerto Rico, an island of 4 million people. The agency has historically operated independent from the commonwealth and has been allowed to pass through the costs of fuel and purchase power. Higher generating reserve are required for PREPA as an island system, which has a total of 5,839 MW of owned and purchased capacity compared with the 2010 peak of 3,404. Concentration of resources in oil exposes PREPA to volatile costs and carbon legislation or regulation. While Fitch views the utility's efforts to diversify its resource mix as a positive, the concentration is off-set by PREPA's ability to pass through fuel and purchased power costs to customers.
The deterioration of operating performance due to weak retail sales, together with the depletion of lines of credit for fuel (due to the 2008 spike in fuel) and working capital (due to increased accounts receivables), resulted in a downgrade to 'BBB+' from 'A-' in November 2009. While the short-term pressure associated with the depleted lines of credit for fuel and working capital have eased with the funding of long-term debt, long-term pressures remain. The authority's debt service coverage of 1.50x is adequate, but transfer payments (contributions in lieu of taxes), which are required to be made to municipalities on the island after debt service payments have been depleting any gain in net assets. Fitch believes that the authority's short-term plan to improve its equity position through cutting expenditures and improve its current liquidity position by decreasing accounts receivables, specifically related to the government sector, is both attainable and required in order to maintain the current rating level.
Puerto Rico's economy is weak and wealth levels are significantly below the levels on the mainland (MHI 39% of U.S. average), which contributes to PREPA's high level of accounts receivables (A/R). Historically, most of PREPA's A/R have been related to customers in the government sector, such as the Department of Education or Puerto Rico Aqueduct and Sewer Authority (PRASA). Net A/R have been greater than 24% of total expenditures since 2006, the highest percentage of any public power utility rated by Fitch. Collection efforts resulted in a noteworthy $98 million (21%) decline in government A/R, but were largely off-set by increases in general accounts receivables.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from J.P. Morgan and Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010.
--'Public
Power Rating Guidelines', dated June 11, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Public Power Rating
Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150
Revenue-Supported
Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
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Contacts:
Fitch Ratings
Primary Analyst
William Drake Richey,
+1-212-908-0325
Associate Director
One State Street Plaza
New
York, NY 10004
or
Secondary Analyst
Christopher Jumper,
+1-212-908-0594
Senior Director
or
Committee Chairperson
Dennis
Pidherny, +1-212-908-0578
Senior Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com