Moody's Negative on $8.23B of P.R. Power Bonds

Moody’s Investors Service assigned a negative outlook to the Puerto Rico Electric Power Authority’s $8.23 billion of outstanding power revenue bonds while affirming its A3 rating.

Moody’s on Aug. 8 downgraded the island’s general obligation bond rating to Baa1 from A3.

In its report dated Tuesday, it also cited “continued weakness in the commonwealth’s economy as evidenced by increasing receivables, and the weakened credit metrics and liquidity.”

The utility, which has about 1.5 million customers, enjoys a monopoly position as Puerto Rico’s only power supplier and independent rate-setting ability. It also has liquidity support from the Government Development Bank for Puerto Rico, the commonwealth’s financing wing.

Moody’s praised PREPA for navigating through the economic slowdown and rising fuel prices. Analysts said the authority has maintained a satisfactory debt-service coverage trend largely due to a willingness to ensure that costs are recovered. Bond covenants include a requirement that maximum annual debt service is covered 1.2 times, Moody’s noted.

But there are challenges, including the significant dominance of fuel oil as a percentage of total energy generation.

The utility is “oil-dependent and highly leveraged,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “Elevated accounts receivables are an issue, with the government, which accounts for 15% of energy sales, contributing to the problem as a late payer.” Messages were left with officials from the GDB seeking comment.

According to the report, government accounts receivables have started to rise again after PREPA made progress in its attempts to fix the problem over the last few years.

Moody’s said it does not expect an upward revision in the short to medium term. “The outlook could be stabilized if there were to be a sustained improvement in PREPA’s cash-flow credit metrics, an improvement in liquidity and a reduction of governmental receivables, or a stabilization or upgrade of the commonwealth’s rating,” the rating agency said.

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Puerto Rico
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