Fitch Ratings has assigned a 'BBB-' rating to the following Guam Power Authority (GPA) revenue bonds:
--Approximately $350 million of senior revenue bonds 2012 series A.
The bonds are expected to be sold via negotiation the week of Oct. 1. Proceeds from the sale will be used to terminate an existing forward purchase agreement, restructure certain bond maturities and refund outstanding senior lien obligations for costs savings.
In addition, Fitch affirms the following ratings on outstanding debt of the authority:
--$523.3 million senior revenue bonds at 'BBB-';
--$56.1 million subordinate revenue bonds at 'BB+'.
The Rating Outlook is Stable.
SECURITY
The current offering and outstanding senior revenue bonds are payable and secured by net revenues of the system. Outstanding subordinate bonds are limited obligations of GPA secured by a lien on and pledge of the net revenues, subject to the prior pledge of revenues securing the senior bonds.
KEY RATING DRIVERS
SOLE PROVIDER ISLAND SYSTEM: GPA benefits from its position as the sole provider of retail electricity to the nearly 160,000 residents of the island of Guam, the western-most territory of the U.S. The island economy is supported by the significant presence of the U.S. Navy, the system's largest customer (18.2% of total revenue).
SUBJECT TO RATE REGULATION: GPA's electric rates are regulated by the local Public Utility Commission (PUC), which limits the authority's financial flexibility and may delay the timing or amount of rate increases necessary to meet operating costs. Recent base rate increases, fuel cost recoveries and changes to GPA's rate structure are viewed favorably by Fitch.
WEAK FINANCIAL PROFILE: Consistently weak operating margins continue to yield low debt service coverage (DSC) and minimal cash reserves. A working capital fund serves as an additional source of liquidity but is exposed to fluctuations in fuel prices and a levelized energy cost recovery mechanism that does not guarantee timely recovery of fuel related costs.
NO FUEL DIVERSITY: Generation resources on Guam are 100% fuel-oil based which exposes GPA to market price volatility. GPA is finalizing an updated integrated resource plan (IRP) which is expected to address fuel diversity and the potential of adding renewable sources to the resource mix. However, progress toward diversification is expected to be slow.
CAPITAL PROGRAM LIKELY TO GROW: GPA's current capital program is manageable, although additional costs associated with developing alternative fuel sources and potentially having to comply with environmental regulations could be substantial.
WEAK ECONOMY TIED TO TOURISM: The Guam economy is heavily influenced by tourism and has been negatively affected by the global economic slowdown and the March 2011 earthquake and tsunami in Japan. Civilian visitors declined 2.3% in fiscal 2011, but fiscal 2012 visitors through June are about 11% higher.
WHAT COULD TRIGGER A RATING ACTION
RESTRICTIVE RATE REGULATION: Future regulatory decisions that prevent the authority from adequately recovering costs would likely result in downward pressure on the rating or Outlook.
LIQUIDITY POSITION: GPA's ability to arrange and maintain access to sufficient liquidity and achieve greater financial stability will be critical factors in any decision to consider any rating action, upward or downward.
CREDIT PROFILE
GPA is the sole provider of retail electricity service to the island of Guam, located in the Pacific Ocean, 3,800 miles southwest of Hawaii. GPA's current governance structure, which has been in place since 2003, has proven to be effective and has helped to dismiss past political risk associated with rate increases and other system approvals.
While the Consolidated Commission on Utilities (CCU), a five member board which governs GPA, has been effective, political risk remains given the island's weak economy and rate payer's sensitivity to escalating electric rates as fuel costs increase.
WEAK BUT STABLE LIQUIDITY
GPA's rating reflects its historically weak financial metrics and Fitch-calculated DSC, which includes both bond debt service as well as capital lease principal and interest payments. Additionally, liquidity remains minimal.
Unrestricted cash on hand at fiscal year-end, Sept. 30, 2011, was modestly lower than the prior year at $27.4 million (30 days cash), although an indenture required working capital fund totaling $28.5 million in provides additional liquidity on an interim basis. Building and maintaining stronger liquidity will remain challenging given GPA's exposure to volatile fuel prices and a limited fuel cost adjustment mechanism but is key to maintaining the ratings at their current level.
RATE INCREASE APPROVED
The PUC recently approved GPA's latest rate filing that included a 6% increase in base rates ($9.1 million) and the implementation of a working capital surcharge adjustment and demand charge effective May 2012. Fitch notes that the timing of the PUC approval was later than anticipated and the approved increases in the base rate and demand charge were lower than GPA's initial request. Financial performance weakened in fiscal 2012 as a result. Nevertheless, Fitch views positively the rate increases and expects Fiscal 2013 results to improve as a consequence.
DECLINE OF OVERDUE GOVERNMENT RECEIVABLES
Long-term receivables have declined to $4.7 million (or $1.8 million when factoring in current portion due in fiscal 2012) from over $40 million in 2003. The customer with the largest balance is Guam Department of Education (GDE) with an outstanding balance of $4.1 million as of Sept. 30, 2011. GDE is on a payment schedule and is currently on target to retire the balance by July 2013.
GPA has benefited from a more favorable government administration who has worked with governmental agencies in getting them to pay their current and prior balances owed to GPA. The authority's bad debt ratio remains very low at 0.2% of revenue in fiscal 2011.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 20, 2011.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
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