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Rating Action:

MOODY'S ASSIGNS Baa1 RATING TO PUERTO RICO ELECTRIC POWER AUTHORITY'S SERIES 2012A AND SERIES 2012B BONDS, DOWNGRADES OUTSTANDING REVENUE BONDS TO BAA1 FROM A3, OUTLOOK IS STABLE

Global Credit Research - 28 Mar 2012

Authority has $7.6 billion of debt outstanding

New York, March 28, 2012 --

Moody's Rating

Issue: Power Revenue Bonds, Series 2012A; Rating: Baa1; Sale Amount: $455,000,000; Expected Sale Date: 04/09/2012; Rating Description: Revenue

Issue: Power Revenue Refunding Bonds, Series 2012B; Rating: Baa1; Sale Amount: $20,000,000; Expected Sale Date: 04/09/2012; Rating Description: Revenue

Opinion

On March 27, 2012, Moody's Investors Service assigned a Baa1 rating to the Puerto Rico Electric Power Authority's (PREPA) Power Revenue Bonds, Series 2012A and Power Revenue Refunding Bond, Series 2012B. Moody's has also downgraded the approximately $7.6 billion of outstanding power revenue bonds to Baa1 from A3. The outlook is stable.

RATINGS RATIONALE

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, Moody's expectation that oil prices will remain high in the near term, and the closer linkage to the Commonwealth of Puerto Rico (G.O. rating Baa1; negative outlook) and financial and liquidity support from the Government Development Bank (GDB) of Puerto Rico (Baa1; negative outlook). Moody's also notes that financial metric deterioration in 2011 was more severe than the previous oil spike in 2008.

Strengths

*PREPA continues to operate as the sole provider of an essential service, historically independent from the Commonwealth's finances and with liquidity support from the Government Development Bank of Puerto Rico

*The board has full rate-setting authority. PREPA can automatically pass through to customers higher fuel and energy costs on a monthly basis

*Sound bond covenants including a requirement that maximum annual debt service is covered 1.20x

*PREPA has also continued to better position the utility with its power resource diversity plan

Challenges

*Significant dominance of fuel oil as a percentage of total generation fuel mix has subjected PREPA to price volatility

*Accounts receivable problem has historically been a pressure on cash flow, though legislative efforts should reduce impact in future periods

*Debt leverage is above median for major public power utilities that own generation

*Frequent changes to executive management continue to provide some instability

*Natural gas conversion plan subject to environmental permitting and construction risk

*Internal financial liquidity is weak

Outlook

The stable outlook is driven by Moody's view that the recent legislative actions will stabilize accounts receivable levels and that our expectation that the authority will be able to execute its long term strategic plan to reduce dependence on fuel oil, which will reduce fuel costs. Moody's notes the stable outlook for PREPA diverges from the current negative outlook for the Commonwealth, but that the credible plans put forth by PREPA warrants a stable outlook.

What Could Change the Rating-UP

Successful implementation of the authority's fuel diversification plan, increased energy sales driven by economic strengthening, improved liquidity above 90 days cash on hand, or sustained debt service coverage as calculated by Moody's above 1.15x could pressure the rating upward.

What Could Change the Rating-DOWN

The rating could be pressured downward if receivables from government entities remain high and unrestricted cash balances remain low, debt service coverage ratios fall significantly below projected levels, or PREPA exhibits increased reliance on the Commonwealth.

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was U.S. Public Power Electric Utilities With Generation Ownership Exposure published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Richard E. Donner
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Maria Matesanz
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S ASSIGNS Baa1 RATING TO PUERTO RICO ELECTRIC POWER AUTHORITY'S SERIES 2012A AND SERIES 2012B BONDS, DOWNGRADES OUTSTANDING REVENUE BONDS TO BAA1 FROM A3, OUTLOOK IS STABLE
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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