June 24, 2008 — While the V.I. Water and Power Authority hung on to its BBB- bond rating for its electric system revenue bonds, Standard and Poor Rating Services cut its "outlook" on WAPA's rating from stable to negative.
On June 10 Standard and Poor downgraded the outlook on WAPA's $197.5 million in outstanding senior and subordinate bonds issued in 1998, 2003 and 2007.
"It's not very good news," WAPA spokesman Cassandra Dunn said Tuesday.
Downgrading the outlook will impact WAPA's future ability to get bonds for capital improvements, Dunn said.
The outlook reflects how long WAPA can maintain its BBB- rating in light of its current financial woes and rapidly rising fuel costs, she said.
Standard and Poor said WAPA's BBB- rating, which is an investment-grade rating given to medium-class borrowers, is "satisfactory at the moment."
Downgrading the outlook puts the utility at risk for a credit standard below investment grade and significantly higher future borrowing costs, said WAPA Director Hugo V. Hodge Jr. in a news release issued Tuesday.
"This comes as another step backwards in our uphill battle to survive our current challenges," Hodge said.
Given the global oil price situation, if WAPA's unrecovered fuel costs increase significantly or if its currently high user rates reduce demand and collections significantly, Standard and Poor could consider lowering the actual BBB- rating, the press release indicates.
However, the report indicates that the outlook could return to stable if WAPA is able to reduce its unrecovered fuel-costs balance over time through Public Services Commission-approved rate adjustments and if costs moderate, improving the affordability of electricity sales to customers.
Unrecovered fuel costs reflect the difference between what the PSC allows WAPA to collect on its cost of fuel and what it actually pays, Dunn explained.
WAPA's financial woes are compounded by the fact that the local government owes $20 million. While the local government keeps current on recent bills, Dunn said that the $20 million is owed for past years.
Standard and Poor analysts also found that, unlike utilities elsewhere, WAPA suffers from an inability to implement a Levelized Adjustment Energy Clause, called the LEAC, which reflects the actual cost of fuel, because the PSC controls rate increases.
According to the news release, the Standard and Poor report notes that in June 2008 the LEAC was 6 cents per kilowatt hour lower than what WAPA had deemed necessary to recover prior-year fuel costs.
As a result, WAPA had unrecovered fuel costs of $21.7 million on April 30. Dunn said that figure is expected to rise to $28 million by the end of June.
Thus, despite the substantial 25-percent rate hike approved by the PSC effective July 1, WAPA would not be able to recover the unrecovered fuel costs unless oil prices were to fall.
"WAPA's liquidity is weak and collections are slow," the Standard and Poor report indicated.
WAPA's growth in energy demand was modest through fiscal year 2008, the Standard and Poor analysts reported. Additionally, they suggested there is a possibility that demand will fall in the face of the higher prices as customers curtail their usage or because of businesses' economic losses.
The analysts also noted that the authority operates in a limited, tourism-concentrated economy, which affects its markets and demand growth. According to the report, WAPA serves 53,000 electric customers, and its largest non-government customers are hotels.
Standard and Poor indicated in its revised outlook report that WAPA's business-risk profile is satisfactory at seven on a scale of one to 10, with one representing low risk.
Standard and Poor is considered one of the world's foremost providers of independent credit ratings for the debt of public and private corporations.
WAPA is also rated by Fitch and Moody's rating services. To date, neither agency has issued a revised outlook.
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