Fitch Ratings Monday downgraded the Puerto Rico Electric Power Authority to BBB-plus from A-minus as the island’s sole electric provider plans to head to market this year with an $850 million new-money deal. The outlook is stable.
The rating changes affects $6.5 billion of outstanding debt.
PREPA’s operating margins have decreased to 4% from a historic average of 14% and Fitch calculates debt service coverage at 1.23 times, down from 1.5. In addition, the authority has eight days cash on hand.
“The downgrade reflects a declining trend in the utility’s financial profile, reduced electric sales, and economic pressures affecting customer delinquencies,” according to Fitch’s report.
The authority earlier this year scaled back its five-year capital improvement plan to $1.7 billion for fiscal 2010 through fiscal 2014, $1.1 billion less than its $2.8 billion capital plan during the prior five years.
Officials anticipate collecting $3.62 billion of total revenue this fiscal year, down from the $4 billion received in fiscal 2009, according to PREPA.
“As PREPA’s sales declined in 2008 and 2009, and account receivables increased, the utility experienced notable declines in its financial operating margins,” according to Fitch.
“While no base rate [increase] has been implemented to date, based upon Fitch’s 2008 report, PREPA officials planned for a base rate increase by 2012.”
The authority anticipates selling $850 million of new-money bonds, with $350 million of the proceeds financing PREPA’s fiscal 2010 capital plan. The remaining funds will repay Citi and JPMorgan $300 million and $200 million, respectively, for loans the banks extended to the utility last year.
Authority officials are also monitoring a basis swap with a notional value of $1.37 billion.
In the agreement, PREPA pays quarterly floating-rate payments based on the SIFMA index to Goldman Sachs Capital Markets in return for quarterly payments of 62% of the London Interbank Offered Rate plus 29 basis points along with an annual fixed-rate payment of 0.4669%.
“While Fitch views as a concern the basis swap PREPA entered into in 2008 for an expected present value of $81 million, management notes that the utility’s collateral posting on this agreement has declined, freeing much of the system’s designated $150 million line of credit,” Fitch said. “Management has stated that the swap is currently performing well and meeting cash-flow targets with minimal to no collateral posting at this time.”
Fernando Batlle, executive vice president of financing and treasury at the Government Development Bank for Puerto Rico, PREPA’s fiscal agent, said government officials will continue to address the authority’s financial challenges.
“While we never like to see a Puerto Rico entity downgraded, GDB notes that Fitch has recognized, via the stable outlook, the fact that PREPA and GDB are actively managing the challenges inherited when the new team took over in January of 2009,” Batlle said via email. “The fact that Fitch also specifically mentioned positive signs associated with Gov. Luis Fortuño’s fiscal stabilization plan is a clear indication that the plan is addressing fiscal challenges in a strong and positive way.”
Moody’s Investors Service and Standard & Poor’s rate PREPA A3 and BBB-plus respectively, both with a stable outlook.
