Rating Agency Revises Outlook on WAPA’s Debt

While affirming, its ‘BBB-‘ long term debt rating on Virgin Islands Water and Power Authority Electric System Revenue Bonds, Standard and Poor’s Ratings Services has revised its outlook on the utility’s rating to “negative” from “stable.” Standard and Poor’s (S&P), considered one of the world’s foremost providers of independent credit ratings for the debt of public and private corporations, formally advised WAPA late last Friday of its decision to revise its rating outlook on $197.5 million in outstanding senior and subordinate bonds issued by WAPA’s electric system in 1998, 2003 and 2007.

According to Hugo V. Hodge, Jr. WAPA’s Executive Director (CEO), this is a very serious cause for concern to the Authority because it puts the utility at risk for a credit standard below investment grade and significantly higher borrowing costs in the future. “As we grapple with our daily financial woes due to the continued skyrocketing price of fuel oil and the refusal of the Public Services Commission (PSC) to allow WAPA to recoup costs through the customer fuel surcharge in a timely manner, this comes as another step backwards in our uphill battle to survive our current challenges,” Hodge said.

According to the Standard and Poor’s report, “the outlook revision reflects the financial and rate impacts of rapidly rising global oil prices, which drive WAPA’s cost structure.” Nellon Bowry, WAPA’s Chief Financial Officer, said that S&P’s revised outlook from stable to negative is a consequence of WAPA’s low cash position and its weakened liquidity due to under recovered fuel costs complicated by high government receivables which presently total $20 million.

In affirming WAPA’s BBB- rating which is an investment grade rating given to medium class borrowers which are “satisfactory at the moment”, S&P stated in its revised outlook report that “WAPA’s business risk profile is satisfactory, at ‘7’ (on a scale of 1 to 10, with “1” representing low risk). Unlike many of its peers in the public power sector, WAPA is not free to set its own rates, as rate increases are subject to

approval by the Virgin Islands Public Services Commission (PSC),” the report also stated. S&P analysts also found that “An additional factor in rate-setting is the pressure to limit base rate increases, given the significant fuel adjustment charge caused by high global oil prices. This was evident in June 2008, when the levelized adjustment energy clause (LEAC) adjustment was 6 cents per kilowatt hour (kwh) lower than what WAPA had deemed necessary to recover prior-year fuel costs,” the report acknowledged. .

In further explaining its rationale for the revised outlook, S&P indicated that “While WAPA has the ability to pass fuel costs on to customers, the PSC has at times shown some reluctance to pass all of the costs on to customers on a timely basis. As a result, WAPA had a deferred fuel balance, as of April 30, 2008, of $21.7 million. Thus, despite the substantial 25% rate hike approved by the PSC effective July 1, 2008, WAPA would not be able to recover the deferred amount unless oil prices were to fall… WAPA’s liquidity is weak and collections are slow.” stated Standard and Poor’s.

Observing that the impact of high fuel prices and WAPA’s financial predicament do not only affect the utility, the S&P analysts reported that WAPA’s growth in energy demand was modest through fiscal year 2008 and there is a possibility that demand will fall in the face of the higher prices as customers curtail their usage or because of business’ economic losses. The analysts also noted that “The authority operates in a limited, tourism-concentrated economy, which affects its markets and demand growth. WAPA serves 53, 000 [electric] customers, and its largest non-government customers are hotels.”

The rating agency’s report concludes on a guarded note indicating that the negative outlook on both the senior and subordinate lien debt reflects the challenges WAPA faces in maintaining a sound financial profile. Given the global oil price situation, if WAPA’s unrecovered fuel costs balance increases significantly, or if its currently high user rates reduce demand and collections significantly, Standard & Poor’s could consider lowering the actual rating. However, “If WAPA is able to reduce its unrecovered fuel costs balance over time through PSC-approved rate adjustments, and if costs moderate—improving the affordability of electricity sales to customers—the outlook could return to stable”, the report concluded.

Standard & Poor’s is a Nationally Recognized Statistical Rating Organization by the U.S. Securities and Exchange Commission. WAPA is also rated by Fitch and Moody’s rating services. To date, neither agency has issued a revised outlook.