Government

Fitch cuts Puerto Rico Electric Power Auth’s credit to junk

Puerto Rico's sole electricity producer, PREPA, has seen its credit downgraded twice in the past year. (Credit: © Mauricio Pascual) Puerto Rico’s sole electricity producer, PREPA, has seen its credit downgraded twice in the past year. (Credit: © Mauricio Pascual)

Fitch Ratings downgraded Wednesday the rating on $8.7 billion of the Puerto Rico Electric Power Authority’s power revenue bonds to “BB” from “BB+,” putting them at junk level. In addition, Fitch also placed the “BB” classification on rating watch negative.

The actions reflect Fitch’s “heightened concerns about PREPA’s ability to manage near-term liquidity demands brought on by maturing bank lines of credit and the required repayment of outstanding loans due in July and August 2014,” the agency said.

In its assessment, Fitch said its rating actions reflect PREPA’s diminished liquidity as evidenced by lower than anticipated cash balances, the maturity of its $250 million line of credit and the pending maturity of a second $550 million line of credit in August 2014.

“Outstanding loans under these lines, estimated at $671 million, are due and payable in July and August. Although efforts to extend the lines are ongoing, the likelihood of extensions is uncertain. PREPA’s cash on hand is insufficient to repay the outstanding short-terms loans,” Fitch said.

With its action, Fitch aligns PREPA’s rating with that of the Commonwealth’s, reflecting its view that the Government Development Bank could provide necessary bridging liquidity support if PREPA is unable to extend or replace any portion of the maturing lines of credit, thereby preventing a PREPA default, it said.

“Any failure by PREPA to sufficiently address the immediate challenges related to its maturing short-term borrowings through the extension of its existing lines of credit, or new liquidity provided by GDB or other banks, would result in negative rating action,” Fitch said.

Regarding its concerns, PREPA Executive Director responded Wednesday saying the agency is “currently evaluating available options to renew credit lines, with the GDB’s help, and be able to have the cash flow on hand to allow the public corporation to meet its financial commitments.”

We’re working on our Strategic Plan and directing all our efforts toward revenue recovery and cost control to maintain healthy liquidity in our finances, which will give way to achieving a sound financial position and advancing our system improvement projects and diversification to natural gas,” he added.

Alicea said that for Fiscal 2015, the agency has identified $170 million in administrative adjustments and will continue to evaluate measures, processes and internal controls designed to increase the efficiency of operations, address financial stability, income levels and the retrenchment of the public corporation.

Fitch on standby
That strategy is something Fitch is awaiting, expecting an updated financial forecast and capital strategy, and will evaluate the plan when it is received. Fitch views recent discussions of a potential base rate increase as positive and necessary to stabilize operations, but the political will for an increase and timing remain uncertain. PREPA has not increased its base rate since 1989.

PREPA’s financial performance through fiscal 2014 remains weak, Fitch said. For the 10 months ended April 30, 2014 the agency reported earnings before depreciation of $645 million and a net loss of $204 million.

“Although figures are slightly improved over fiscal 2013, both are below budget due, in part, to the continuing downward trend in energy sales. Recent discussions of a base rate increase are positive and necessary to stabilize operations, but the political will for an increase and timing remain uncertain,” Fitch said.

Meanwhile, total receivables remain high at more than $1.5 billion and approximately 32.6 percent of annualized fiscal 2014 revenues — up from 28.8 percent at fiscal year-end 2013.

“Although the effect of mounting government receivables on cash flow appears to be mitigated through the accrual of contributions in lieu of taxes, bondholders remain disadvantaged as CILT payments are subordinate to debt service payments,” the agency said.

Finally, Fitch said it favorably views PREPA’s efforts to reduce dependency on oil-fired generation, primarily via the conversion of existing plants to dual fuel (oil and natural gas) generation and the build out of liquefied natural gas infrastructure. However, PREPA will need access to additional capital to fully execute this capital plan, it said.

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