The Puerto Rico Electric Power Authority will sell $200 million of tax-exempt refunding debt early next week to generate interest-rate savings.
JPMorgan will begin institutional pricing Tuesday after a one-day retail order period on Monday. Nixon Peabody LLP is bond counsel. PREPA’s financial adviser is the Government Development Bank for Puerto Rico.
The transaction is a current refunding. The Series 2010DDD power revenue refunding bonds will pay down outstanding debt and grab at least 3% of net-present-value savings, said Fernando Batlle, executive vice president of financing and treasury at the GDB. The preliminary official statement does not indicate the potential bonds to be refunded.
Batlle declined to say which series the GDB was considering as potential refunding candidates.
“We had been working on taking this transaction to the market,” Batlle said. “We’re ready now to do it and the rate environment is favorable to us. So we’re just taking advantage of the conditions.”
PREPA has $7.4 billion of outstanding bonds, as of Aug. 31, according to the POS. Fitch Ratings and Standard & Poor’s rate the credit BBB-plus. Moody’s Investors Service rates it A3.
Matt Fabian, managing director of Municipal Market Advisors, said PREPA’s refunding will benefit from the triple tax-exemption Puerto Rico municipal bonds offer to investors.
While Puerto Rico’s sales tax bonds, called COFINA bonds by their Spanish acronym, carry higher, single-A ratings, PREPA is the island’s sole electric provider, where it serves a population of about four million.
“After the COFINAs, it may be the strongest credit in Puerto Rico,” Fabian said. “And there’s so much demand for triple tax-exemption that this is going to trade fairly well. It’s going to trade better than its rating, which is to say better than the commonwealth because the commonwealth general obligation credit sets the bar for what’s a triple-B.”
Moody’s and Standard & Poor’s rate Puerto Rico’s GO credit A3 and BBB-minus, respectively.
To address volatile oil prices and the commonwealth’s prolonged recession, which has trimmed energy sales, the authority has cut its workforce by more than 800 employees, reduced health care benefits, and curbed overtime costs and other expenses. PREPA expects those changes to bring in approximately $121 million of savings per year, according to the POS.
The authority plans to cut its payroll by another 750 workers during the next three fiscal years, saving about $15 million a year.
In addition, fiscal 2010 electricity sales increased by 3.9% after two consecutive years of declining sales. Net revenues in fiscal 2010 rose $116.3 million to $745.8 million, an 18.5% boost, according to the POS. Fiscal 2010 ended June 30.
“Last year, PREPA said they had a plan and a year later that plan has been executed,” Batlle said. “And net revenues are up by a significant amount, 18.5%, so they are in good shape financially.”
The authority anticipates its electricity sales will decline by 0.2% in fiscal 2011 and 0.1% in fiscal 2012, before rebounding through the end of fiscal 2015.
PREPA anticipates its net revenues will total $836 million this fiscal year, growing to $872.5 million in fiscal 2015. Those projected revenues will offer the authority debt-service coverage ratios of 1.75 times for this fiscal year and 1.54 times in fiscal 2014 and fiscal 2015, according to the POS.
Nearly 70% of the authority’s energy production comes from oil. Fuel accounts for more than 50% of expenses. Officials are working to convert oil-fired power plants to natural gas and adding new coal-burning facilities. PREPA is also looking into renewable energy projects.
Recently enacted legislation calls for 12% of the island’s energy to be generated from renewable energy sources in fiscal 2015 and 15% in fiscal 2020.
