Puerto Rico Aqueduct and Sewer Authority Increases Rates by 60%

The Puerto Rico Aqueduct and Sewer Authority board of directors voted to increase water rates by 60%, a move that’s being hailed as a positive for both PRASA’s credit and the territory’s financial management.

Wednesday's vote, which is a final action, comes after Puerto Rico Gov. Alejandro García Padilla said earlier this year that he will not provide support to the island’s authorities.

“Assuming that this action is permanent, that new rates will be implemented, and collections adequately enforced, this board action is a very positive step forward toward PRASA’s self-sufficiency, in meeting its obligations to bondholders and reducing its financial dependence on the Government Development Bank of Puerto Rico,” said Municipal Market Advisors managing director Robert Donahue.

Though the Puerto Rico government has given PRASA financial support in the past, the Puerto Rico government does not provide the authority any in the fiscal 2014 budget signed Sunday. PRASA president Alberto Lázaro said that lack of government intervention necessitated the water rate increase, and the authority will not need any government support in the foreseeable future.

“I am very impressed with the adeptness shown by the GDB leadership team in approaching a very difficult financial and political situation, and convincing reluctant political leaders that safeguarding Puerto Rico’s ratings and access to the capital markets is critical,” Donahue said. “The administration must continue to strike a delicate balance of raising revenues and improving its dire fiscal condition while simultaneously reviving, not exacerbating, a fragile economy.”

Herbert J. Sims senior credit analyst Richard Larkin wrote in e-mail that the rate increase shows that García Padilla “is following through on his promises made earlier this year as he was crafting his budget and financial plans for the utilities and highways authority.”

“Defaults and bankruptcies are a by-product of weak economics, but they are usually the direct result of poor management—self-inflicted wounds when faced with difficult decisions,” Larkin wrote. “Puerto Rico is showing strong management and leadership and that will hold them in good stead in the next two years as they continue to try getting back on track.”

As of Dec. 31, PRASA had $4.8 billion in debt outstanding, about a quarter of it commonwealth-guaranteed or government-backed. The authority’s senior non-guaranteed or backed debt is rated Ba1 by Moody’s Investors Service, BB-plus by Standard & Poor’s, and BBB-minus by Fitch Ratings.

PRASA’s water rates are structured in different tiers. Customers who use greater volumes of water are put in higher tiers, which pay higher rates per cubic meter of water. The water rates also cover the authority’s sewer service.

The new rates introduce two new charges, said PRASA president Lázaro. Customers will now pay an environmental compliance charge to address consent decrees that the authority has signed. The amount of the charge will depend on what tier customers are in, Lázaro said.

The new rates will also include a $2 per month per customer charge for “sustainability projects,” Lázaro said. The money will be used for pay-as-you-go capital projects. Some of the money will be used to bring safe drinking water to 200,000 island residents who are now without. It will also help with watershed conservation, Lázaro said.

The board had originally proposed a $485 million per year increase in water revenues, Lázaro said. However, the Puerto Rico government recently passed a law directing the Puerto Rico Electric Power Authority to give PRASA a preferential electric rate. Also, a committee found PRASA $70 million in additional savings.

Because of these savings, PRASA approved slightly lower rates that will bring in $420 million in additional revenues each year, Lázaro said. While the original proposal was for a roughly 67% increase, the approved rates are for an approximate 60% increase, Lázaro said.

The new rates will give PRASA ample debt coverage, Lázaro said. The authority guarantees 2.5 times debt coverage on the senior debt and the new rates will provide four times debt coverage.

While PRASA had projected a deficit of $340 million for fiscal year 2014, the rate increase will eliminate this deficit and prevent future deficits through at least 2017, Lázaro said. PRASA will not need any further increases for at least four to five years.

PRASA is funding this year’s capital improvement plan with lines of credit from local banks of $350 million, Lázaro said. In 12 to 24 months the authority plans to bond this debt out. It will also issue additional bonds in fiscal 2015, he said.

PRASA plans to spend $1.5 billion on capital spending in the next five years, Lázaro said. However, external sources may provide for up to $1.2 billion of this money.

One of PRASA’s biggest problems has been non-revenue producing water, many analysts have stated. The authority is going to continue to attack this problem, Lázaro said.

PRASA provides water service to nearly the entire island and provides sewer service to about 60% of the island’s inhabitants.

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