Facing the possibility of technical default on tens of millions in bonds for not meeting debt-coverage ratios, the V.I. Water and Power Authority will ask for increases to both the electric and water system base rates, its governing board decided Thursday.
Under the terms of a $29.2 million bond, WAPA is required to request the water system base rate increase, WAPA Chief Financial Officer Joseph Boschulte said at the board meeting on St. Croix.
Without the increase in base-rate revenue, WAPA will be very unlikely to meet the terms of the bond, Boschulte said.
"The water system has missed its debt service coverage for the water system for 2009, 2010, and with the closing of 2011 financial statements, it is expected we will miss the debt service coverage again," Boschulte said. WAPA is making all its payments, so there is no actual default, just a technical violation, he said, a violation that could become a serious problem if it is not addressed.
"Investors are not clamoring now because they are still being paid," he said. But those investors could raise the issue, and if the base rate is increased first, "then we get to say we have already remedied it," he said.
The debt coverage ratio is a measure of how creditworthy an organization is. In this case it is WAPA’s annual operating income divided by the total amount of all interest and principal paid on all of WAPA’s loans.
On the water side, WAPA is requesting an increase of about three cents per thousand gallons, bringing the base rate from 8 cents to 11 cents per thousand gallons. WAPA is also requesting a decrease in the Levelized Energy Adjustment Clause fuel surcharge of roughly $2.50 per thousand gallons, so the two will largely cancel each other out. A typical household using roughly 2,400 gallons per month would see their bills increase by $2 or $2.50, Boschulte said.
For electricity customers, WAPA is asking for a base rate increase between 2.75 and 3 cents per kilowatt hour. A customer consuming the average residential monthly usage of 500 kilowatt hours, will see their bills increase about $11 to $13 dollars, very slightly offset by a very slight decrease in the LEAC, Boschulte said.
Unlike its situation with the water system, WAPA is not contractually obligated to request an increase in the electric system base rate. But WAPA is on a negative ratings watch by all three ratings agencies, "primarily due to the closing of Hovensa," Boschulte said. Increasing its revenue stream will help reassure the ratings agencies and potential lenders. It will also help address liquidity concerns and provide revenue sufficient to meet the operational, fiscal and financial obligations and goals of WAPA, he said.
The water base rate increase will generate $2 million and the electric rate increase $15 million in additional annual revenues, according to WAPA.
WAPA bonds are currently at low to medium investment grade levels of BBB- to BB+, but WAPA is hoping to bring that up to a full investment grade rating.
While the proposed increases will not financially impact WAPA’s fiscal condition as it ends the fiscal year on June 30, WAPA expects to improve its cash position next year if the emergency rates are approved by the PSC.
The governing board also authorized WAPA Executive Director Hugo Hodge Jr. to proceed with refinancing its existing 1998 bonds at its board meeting today. WAPA is seeking to $58 million in bond financing.
According to Hodge, WAPA will be able to capitalize on lower interest rates, increase its liquidity and improve its bond rating from the three major bond rating agencies.
The bond financing will allow for the refunding of the remaining $17 million in 1998 bonds; the refinancing of the $18 million First Bank term loan balloon payment on a $40 million loan; the refinancing of the $10 million Banco Popular working capital line of credit; the refinancing of the $10 million First Bank working capital line of credit; and the refinancing of $3 million for the fuel purchases line of credit.
The board also ratified the use of $4.9 million from WAPA’s First Bank line of credit as a down payment on the General Electric contract for the lease of a 22-megawatt power generator for the St. Thomas power plant. The 18-month generator lease will allow WAPA to complete repairs and perform preventive maintenance to its other generating units, which were deferred over the past years.
The board also approved:
– Property insurance coverage through March 31, 2013, from Wortham Insurance and Risk Management for a premium not to exceed $2.7 million and to obtain a bank loan for the same amount to make the payment. The insurance will provide a funding source to replace or repair the authority’s covered properties beyond the deductibles and inside of maximum allowed limits of this policy in case of a disaster;
– The design, purchase, construction and installation of four metal air condition insulated buildings to house the East End and Tutu substations’ 15 kilovolt and 34 kilovolt switch-gears at Estates Nazareth and Charlotte Amalie on St. Thomas. American Buildings Company will be contracted to fabricate and supply the buildings for $62,000, while Elephant Construction will assemble, construct and install the switchgear housings at a cost of $215,000. This construction will improve substation equipment reliability and reduce maintenance work intervals. The project is estimated to take 136 days to complete;
– Increasing the scope of a contract with Rotating Equipment for the Anna’s Hope Waterline Rehabilitation project to install an additional 800 linear feet of water main, including valves, and service connections and increasing the cost of the project by $80,000 to $603,500;
– Renewing the rental lease with Sugar Beach Condominiums on St. Croix for business purposes for six months, with an option to renew for an additional six month period through March 2013, at a monthly rate of $2,500 and;
– The purchase of materials for the St. Thomas Main Street Underground Hazard Mitigation Project from Electric Supply of Tampa to move overhead power lines underground at a cost of $755,000.
Present at the meeting were Board Chair Juanita Young, Gerald Groner, Noel Loftus, Licensing and Consumer Affairs Commissioner Wayne Biggs and V.I. Energy Officer Director Karl Knight. Absent were Cheryl Boynes Jackson, Planning and Natural Resources Commissioner Alicia Barnes, Donald Francois and Brenda Benjamin.
