Fitch Ratings, saying this Pacific island territory of the U.S. faces a heavy cost for reworking its power generation, has assigned a ‘BBB-‘ rating to revenue bonds of the Guam Power Authority (GPA).
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 affirmed existing ratings on other GPA bonds. The Rating Outlook, though, was revised to Negative from Stable.
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., Fitch noted. 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.
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.
Fitch views positively the authority’s strategic energy plan, which will diversify the fuel mix and facilitate compliance with environmental regulations, through a conversion to dual-fuel generation and the addition of renewable energy via power purchases. Projected costs are sizeable, and the permitting process could be lengthy, but Fitch said it 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.
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.
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 Protection Agency. 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 $691m, 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, Fitch said.
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 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.
The previously anticipated re-location of nearly 5,000 U.S. Marines from Okinawa to Guam is reportedly proceeding following a protracted delay, Fitch said. The increase in military personnel, while smaller than previously expected, is still viewed positively by Fitch. The island’s unemployment rate has declined from almost 15% midway through 2013 to about 10% based on the latest data available.