New York – (Business Wire) – Fitch Ratings has affirmed the ratings on the following bonds issued by the Guam Power Authority (GPA or the authority):
–$523.3 million senior revenue bonds at ‘BBB-‘;
–$56.1 million subordinate revenue bonds at ‘BB+’.
The Rating Outlook on all bonds is Stable
The senior revenue bonds are payable and secured by net revenues of the system. The subordinate bonds are limited obligations of GPA secured by a lien on and pledge of the net revenues, subject to the prior pledge of revenues securing the senior bonds.
KEY RATING DRIVERS
SOLE PROVIDER ISLAND SYSTEM: GPA benefits from its position as the sole provider of retail electricity to the 175,000 residents of the island of Guam, the western-most territory of the U.S. The island economy is supported by the heavy and increasing presence of the U.S. Navy, the system’s largest customer (18.2% of total revenue).
SUBJECT TO RATE REGULATION: GPA’s electric rates are regulated by the local Public Utility Commission (PUC), which limits the authority’s financial flexibility and may delay the timing or amount of rate increases necessary to meet operating costs. Recent base rate increases, fuel cost recoveries, and changes to GPA’s rate structure are viewed favorably by Fitch.
WEAK LIQUIDITY: GPA’s working capital fund is exposed to fluctuations in fuel prices and a levelized energy cost recovery mechanism that does not guarantee timely recovery of fuel related costs.
NO FUEL DIVERSITY: Generation resources on Guam are 100% fuel-oil based which exposes GPA to market price volatility. GPA is finalizing an updated integrated resource plan (IRP) that is expected to address fuel diversity and the potential of adding renewable sources to the resource mix. However, progress toward diversification is expected to be slow.
ECONOMY TIED TO TOURISM: The Guam economy is heavily influenced by tourism and has been negatively affected by the global economic slowdown and the March 2011 earthquake and tsunami in Japan. Civilian visitors declined 2.3% in fiscal 2011, but fiscal 2012 visitors through March are 6.2% higher.
WHAT COULD TRIGGER A RATING ACTION
RESTRICITIVE RATE REGULATION: Future regulatory decisions that prevent the authority from adequately recovering costs would likely result in downward pressure on the rating or Outlook.
LIQUIDITY POSITION: GPA’s ability to maintain access to sufficient liquidity and achieve greater financial stability will be critical factors in any decision to consider any rating action, upward or downward.
GPA is the sole provider of retail electricity service to the island of Guam, located in the Pacific Ocean, 3,800 miles southwest of Hawaii. GPA’s current governance structure, which has been in place since 2003, has proven to be effective and has helped to dismiss past political risk associated with rate increases and other system approvals. While the Consolidated Commission on Utilities, a five member board which governs GPA, has been effective, there still remains some political risk given the island’s economy and rate payer’s sensitivity to rising electric rates as fuel costs increase.
WEAK BUT STABLE LIQUIDITY
GPA’s rating reflects its weak financial metrics and debt service coverage history, which includes both bond debt service as well as capital lease principal and interest payments. Additionally, liquidity is minimal and given GPA’s exposure to volatile fuel prices and a limited fuel cost adjustment mechanism, the utility has difficulty building and maintaining reserves. Cash on hand at fiscal year end, Sept. 30, 2011, was modestly lower than the prior year at $27.4 million (30 days cash). Building and maintaining stronger liquidity is key to maintaining the ratings at their current level.
RATE INCREASE APPROVED
The PUC recently approved GPA’s five-year rate plan that included a 6% increase in base rates ($9.1 million) and the implementation of a working capital surcharge adjustment and demand charge effective May 2012, which is favorable. The approved increase was lower than GPA’s request (10.7%) over the period, but is positive nonetheless.
OVERDUE GOVERNMENT RECEIVABLES HAVE DECLINED
Long-term receivables have declined to $4.7 million (or $1.8 million when factoring in current portion due in fiscal 2012). The customer with the largest balance is Guam Department of Education (GDE) with an outstanding balance of $4.1 million as of Sept. 30, 2011. GDE is on a payment schedule with GPA of approximately $200,000 per month with 4.47% annual interest and is expected to make the final payment in July 2013. GPA has benefited from a more favorable government who has worked with agencies in getting them to pay their bills as well as what was owed from previous years.
Additional information is available at ‘www.fitchratings.com’. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch’s Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
–‘Revenue-Supported Rating Criteria’ (June 12, 2012);
–‘U.S. Public Power Rating Criteria’ (Jan. 11, 2012).