NEW YORK - Moody’s Investors Service on Wednesday downgraded Puerto Rico Electric Power Authority’s $7.6 billion outstanding power revenue bonds to Baa1 from A3, citing weakened liquidity and a reduced electricity demand.
The revised rating also applies to the authority’s $475 million power revenue bonds to be sold next month. The outlook is stable.
“The rating reflects the recent and forecasted weakened credit metrics and liquidity, continued weakness in the Commonwealth’s economy as evidenced by reduced electricity demand,” and high oil prices in the near term, Moody’s said in its report.
The authority, one of the largest public power systems in the U.S. and the sole provider of power in Puerto Rico, plans to issue the new and refunding bonds on April 11, with retail pricing on April 10, according to José R. Otero-Freiría, vice president for the Government Development Bank, which is the authority’s financial advisor.
Proceeds from the bonds will go toward its capital improvement plan and refunding previously issued debt. Underwriters will be lead by Morgan Stanley.
Moody’s cited as strengths the authority’s position as sole provider of an essential service and sound bond covenants, including a requirement that maximum annual debt service is covered 1.20 times.
The rating would go up, Moody’s said, if the authority implements its fuel diversification plan, if energy sales increase, or if debt service coverage is sustained above 1.15 times.
Fitch Ratings and Standard & Poor’s affirmed their BBB-plus ratings and both assigned a BBB-plus to the new bonds.
S&P gave the bonds a stable outlook, while Fitch Ratings lowered its outlook to negative from stable. The negative outlook reflects the authority’s “slimmer operating margins and cash flow,” escalated fuel costs and declining electricity usage, Fitch said, adding that rate relief is unlikely.
“Fitch’s negative outlook takes into account that PREPA is facing a confluence of fiscal and operational challenges that could jeopardize forecast cost reductions. Fitch believes that there is a low likelihood that base rate increases would be implemented to improve financial performance,” the report said.
