Puerto Rico $7.6 Billion of Electric Bonds Cut a Step

Puerto Rico Electric Power Authority (27482MF) had its rating cut one step by Moody’s Investors Service, which cited the issuer’s weakened liquidity and reduced electricity demand.

The reduction to Baa1, third-lowest investment level, from A3 affects $7.6 billion of debt outstanding, the rating company in New York said today in a report. The grade also applies to $475 million in revenue-refunding bonds to be sold next month.

The authority, overseeing the largest U.S. public power system, plans to issue the new bonds as soon as the week of April 9, Jose Otero, vice president of financing for the Government Development Bank, the commonwealth’s borrowing agent, said by telephone from San Juan. Proceeds will help finance capital improvements as well as refund debt, according to offering documents. Moody’s said the credit 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 continuing high oil prices, Moody’s analysts led by Richard Donner said in the report. They said the utility relies mainly on oil for generator fuel.

About 67 percent of the authority’s electricity is produced by oil-fired plants, Otero said. He said that the utility is working to diversify fuel types by converting generators to burn natural gas.

Fitch Revision

Fitch Ratings revised its outlook for the authority’s credit to negative from stable today, citing “slimmer” operating margins and cash flow in fiscal 2011, as well as growing fuel costs and declining electricity usage. Fitch and Standard & Poor’s have assigned BBB+ grades to the bonds to be sold next month, both equivalent to the Moody’s level.

Another challenge confronting the utility is collecting bills, the Moody’s analysts said, citing that as a “pressure on cash flow.” However, they said, “legislative efforts should reduce impact in future periods.”

A proposed measure would require the Management and Budget Office to pay any unpaid electricity bills owed by commonwealth agencies and departments, Otero said. The effect “will reduce the accounts payable from the central government” and improve the utility’s liquidity, he said.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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