NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the following revenue bonds of Guam Power Authority (GPA or the authority):
--Approximately $84,800,000 revenue bonds, 2014 series A.
The series 2014 series A bonds are scheduled for negotiated sale in September. Bond proceeds will provide funds for GPA's capital program, fund a debt service reserve, pay capitalized interest and costs of issuance.
In addition, Fitch affirms the following ratings:
--$491,1 million senior revenue bonds, 2012 series A and 2010 series A, at 'BBB-';
--$27.3 million subordinated revenue bonds, 2010 series A, at 'BB+'.
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a first lien on net revenues of GPA. Outstanding subordinated revenue bonds are limited obligations of GPA secured by a lien on, and pledge of, net revenues, subject to the prior pledge of revenues securing the senior bonds. A default on the subordinated revenue bonds would not trigger a default on the senior revenue bonds.
KEY RATING DRIVERS
SOLE POWER PROVIDER: GPA benefits from its position as the sole provider of retail electricity to the nearly 160,000 residents of the island of Guam, the westernmost territory of the U.S. The significant presence of the U.S. Navy, which accounts for nearly 20% of GPA's total annual revenue, provides stability to the island's economy and the authority's customer base.
OUTLOOK REVISION TO NEGATIVE: The revision in Outlook reflects Fitch's concerns that the risks associated with the authority's plan to reduce its dependence on oil-fired generation through a system-wide conversion to dual-fuel generation (natural gas/oil-fired), as well as the sizable costs and related debt obligations, could weaken leverage metrics and operating flexibility to levels consistent with more speculative-grade credits.
WEAK FINANCIAL PROFILE: Weak operating margins continue to generate Fitch-calculated debt service coverage of senior and subordinate lien debt and capital lease obligations of about 1.0x and provide for minimal cash reserves. Although, Fitch expects recent base rate increases coupled with a sizeable reduction in annual debt service obligations beginning in fiscal 2016 will improve financial metrics over the next several years, the authority's debt-funded capital plan is likely to increase leverage and debt service requirements over the longer term.
SUBJECT TO RATE REGULATION: GPA's electric rates are regulated by the Guam Public Utility Commission (PUC), which authorizes cost recovery through both base rates and a levelized energy adjustment clause (LEAC) for fuel and other related costs. The PUC's responsiveness to requests for cost recovery in recent years is viewed favorably by Fitch, but delays inherent in both the regulatory process and the recovery mechanism will continue to impair liquidity and limit overall financial flexibility.
POWER SUPPLY DIVERSIFICATION: Fitch views positively the authority's strategic energy plan, which will diversify the authority's fuel mix and facilitate compliance with environmental regulations, through a conversion to dual-fuel generation and the addition of renewable energy via purchases. Projected costs are sizeable, and the permitting process could be lengthy, but Fitch expects the plan will ultimately result in a newer, significantly more efficient generation fleet that allows for greater diversity in fuel supply. Lower projected fuel costs could also provide GPA with additional flexibility to absorb high debt service costs.
LIMITED ECONOMIC PROFILE: The authority's service area exhibits weak, but improving income levels and persistently high unemployment as a result of Guam's largely tourism-based economy. Favorably, receivables have remained at a manageable level and annual bad debt expenses are consistently low.
IMPLEMENTATION OF POWER SUPPLY PLAN: Fitch expects to resolve the Negative Outlook as the full impact of the proposed energy conversion plan becomes more clearly defined over the next two years. Expectations that project costs and related debt levels associated with implementing the energy plan could weaken operating and financial performance beyond what is currently forecast will likely trigger negative rating action.
POWER SUPPLY CONVERSION
The strategic efforts by the authority's management team over the next several years will be focused primarily on complying with environmental regulations imposed by the U.S. Environmental Agency (EPA). The authority is in the early stages of gaining the necessary regulatory approvals needed to execute its resource implementation plan, which includes the installation of new generation units, retiring older generating units and ultimately converting to liquefied natural gas (LNG) as a primary fuel source.
The expected cost is sizeable, estimated to be $691 million, although the conversion to dual-fuel generation as well as the planned addition of renewable sources of power supply will eventually provide for greater fuel diversification and effectively satisfy the EPA's maximum achievable control technology (MACT) standards.
The authority expects to rely significantly on debt issuance to fund the vast majority of the associated costs. Fitch expects debt service costs will rise considerably as a result, although the full impact of the additional debt will not occur until beyond the authority's current financial forecast period of 2014-2018. Fitch remains concerned that net operating margins beyond fiscal 2018 will begin to compress as the vast majority of debt issued in support of the energy conversion plan begins amortizing.
ISLAND UTILITY SYSTEM
Guam is the westernmost territory of the U.S., located approximately 3,800 miles southwest of Honolulu, HI, and almost 1,600 miles southeast of Tokyo, Japan. The island's population grew by a nominal 3% over the prior decade, reaching an estimated 159,350, according to the 2010 U.S. Census.
GPA provides electric generation, transmission, and distribution service on a retail basis to a largely residential service territory anchored by the U.S. military. Customers are served primarily through owned generation, and to a lesser extent through three energy agreements with independent power producers (IPPs). Owned generating resources of the authority totaling 357.4 MW consist of three oil-fired steam generating units, four combustion turbine units, and 14 diesel units. Total available capacity is twice the system's record peak demand and well in excess of projected future demand.
WEAK FINANCIAL PROFILE
The authority's already weak financial metrics diminished somewhat in fiscals 2012 and 2013 after a short-term gain in fiscal 2011. A decline in energy sales coupled with a sizeable increase in debt service costs reduced Fitch calculated debt service coverage to just below 1.0x in both years. Unrestricted cash also declined in recent years, dropping from 30 days of operating cash on hand in fiscal 2011 to just 17 days over the prior two years; however, the inclusion of restricted working capital funds improves the ratio to about 45 days.
GPA's financial forecast through fiscal 2018 shows Fitch calculated debt service coverage increasing over the next three fiscal years before leveling off at about 1.3x. The forecast conservatively assumes that rates are held constant, sales remain flat, and no impact from a planned military build-up. GPA's projections also assume all energy conversion projects are financed on the authority's balance sheet. Longer term projections are not available.
Guam receives over 1 million visitor arrivals annually, the majority of which are from Japan. Tourism and the U.S. military are the primary contributors to Guam's economy, accounting for slightly more than half of the island's employment opportunities.
The previously anticipated relocation of nearly 5,000 U.S. Marines from a base in Okinawa to Guam is reportedly proceeding following a protracted delay. The increase in military personnel, while smaller than previously expected, is still viewed positively by Fitch, as nearly all related infrastructure costs are expected to be borne by the U.S. Navy.
The island's unemployment rate has declined from almost 15% midway through 2013 to about 10% based on the latest data available. Similar to all U.S. Territories, wealth indicators rank significantly lower than those of the U.S., although Guam's median household income is significantly higher than its island peers.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum - June 2014