Ratings Firm Fitch Has Again Downgraded WAPA Bonds

Fitch Ratings has once more downgraded Virgin Islands Water and Power Authority bonds, sending WAPA further into junk status.

The ratings group downgraded some $131,850,000 electric system revenue bonds series to ‘B+’ from ‘BB-‘; and $96,800,000 electric system subordinated revenue bonds series ‘B’ from ‘B+’.

Additionally, Fitch has removed the ratings from rating watch negative and assigned a negative rating outlook.

According to Fitch, the rating downgrade reflects WAPA’s reduced capacity for timely repayment of outstanding debt service obligations as evidenced by a persistent strain on available liquidity. Liquidity pressures have been driven by consistently low unrestricted cash reserves balances, the continuation of high government receivables and high levels of borrowing under the authority’s available lines of credit. Unrestricted cash has continued declining, falling from $10.9 million at fiscal year-end 2015 (fiscal year ended June 30, 2015) – to just $2.1 million (equal to just four days of cash on hand) through May 2016 based on interim financial results. Remaining borrowing capacity under the lines of credit totals just $2 million.

Fitch says the negative outlook reflects its concern that capacity for continued payment is vulnerable to further deterioration. Exacerbating WAPA’s operating pressure is a lawsuit initiated earlier this year by the authority’s former fuel supplier alleging failure to pay almost $25 million in fuel delivery charges, according to the firm.

Moreover, Fitch expects that, despite modest headway made recently in reducing receivables attributable the USVI government (Issuer Default Rating of ‘B+’/Negative Outlook), additional progress is increasingly unlikely given the significant financial and economic pressures confronting the USVI.

Fitch believes the authority’s ongoing efforts to diversify its power supply should ultimately have a stabilizing impact on electric rates and declining sales despite cost overruns and delays. WAPA is converting its oil-fired generating plants to tri-fueled capability with liquefied petroleum gas (LPG, or propane) as the primary fuel source initially. While the authority has already completed the conversion of two generating units on each island (St. Thomas and St. Croix) and begun burning propane, recent project cost increases and delays in project completion are a concern, Fitch says.

Fitch deemed the territory as geographically and economically challenged, largely dependent on tourism and government employment. Strains related to the USVI’s narrow economy are compounded by the authority’s exceptionally high electric rates, declining sales, and per capita personal income levels that approximate just half of the U.S. average, according to the ratings firm.

Fitch says improved liquidity, as evidenced by higher unrestricted cash balances and greater borrowing capacity under its lines of credit, more timely receipt of payment from the USVI government, base rate increases and the positive resolution of pending litigation could provide some additional cushion over the near-term and stabilize the current ratings.