Fitch Ratings has downgraded the rating on $8.7 billion of Puerto Rico Electric Power Authority (PREPA) power revenue bonds to 'BB' from 'BB+'. In addition, Fitch has also placed the 'BB' rating on Rating Watch Negative.
The 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 on-going, the likelihood of obtaining extensions is uncertain. PREPA's cash on hand is insufficient to repay the outstanding short-terms loans.
The alignment of PREPA's rating with the rating of the Commonwealth of Puerto Rico ('BB', with a Negative Outlook) reflects Fitch's view that the Government Development Bank of Puerto Rico (GDB) 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.
Traditionally, Fitch has not strictly linked PREPA's rating with that of the commonwealth's. However, given the possibility of greater reliance on support from the commonwealth and the GDB, the ratings are being appropriately aligned.
PREPA's financial performance through fiscal 2014 remains weak. For the 10 months ended April 30, 2014 PREPA 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.
Through the first 10 months of fiscal 2014, energy sales continued to fall by 3.7%.
PREPA will need access to additional capital to fully execute the capital plan to reduce dependency on costly 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 (LNG) infrastructure.
With PREPA's completed conversion of the Costa Sur generating facility to dual-fuel (25% of energy mix) fuel costs have improved modestly during fiscal 2014 (15 cents/kWh versus 16 cents/kWh in fiscal 2013), providing some cost relief.
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