NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings on the following U.S. Virgin Islands (USVI) Water and Power Authority (WAPA) revenue bonds:
--$127,045,000 electric system revenue bonds, series 2012A, 2010A, 2010B, 2010C, 2003 to 'BB-' from 'BB';
--$100,135,000 electric system subordinated revenue bonds, series 2007A, 2012B, 2012C to 'B+' from 'BB-'.
In addition, the ratings for the bonds have been placed on Rating Watch Negative.
Fitch expects to resolve the Rating Watch within the coming months following the release of audited financial statements for fiscal year ending June 30, 2015 and preliminary financial results for the current fiscal year, resolution of a pending rate case, negotiations to extend expiring lines of credit and greater clarity on potential obligations that could arise from pending litigation.
SECURITY
The electric system revenue bonds are secured by a pledge of net electric revenues and certain other funds established under the bond resolution. The electric system subordinated revenue bonds are secured by a pledge of net revenues that are subordinate to the pledge securing the electric system revenue bonds. A default on the subordinate lien bonds does not trigger a cross default on the senior revenue bonds.
KEY RATING DRIVERS
PERSISTENTLY STRAINED LIQUIDITY: The 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, escalation in already high government receivables and high levels of borrowing under the authority's available lines of credit. Through the first six months of the current fiscal year, unrestricted cash declined to just $5.1 million (equal to 18 days cash on hand), compared to $10.9 million at fiscal year-end 2015. Moreover, remaining borrowing capacity under the lines of credit totals just $2 million.
LIMITED MARGIN OF SAFETY REMAINS: The Rating Watch Negative reflects Fitch Ratings concern that capacity for continued payment is vulnerable to deterioration. Exacerbating WAPA's operating pressure is a lawsuit recently initiated by the authority's former fuel supplier alleging failure to pay almost $25 million in fuel delivery charges and continuing build-up of the USVI government (Implied General Obligation rating of 'BB-') receivables.
POWER SUPPLY DIVERSIFICATION: 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 have been a concern.
CONSTRAINED COST-RECOVERY MECHANISMS; RATE CASE PENDING: Electric rates are regulated by the Virgin Islands Public Service Commission (PSC), which has authorized cost recovery through both base rates and a levelized energy adjustment clause (LEAC) for fuel and other related costs. Delays inherent in both the regulatory process and the recovery mechanism impair liquidity and limit financial flexibility. Retail rates ($0.29/kwh) remain exceptionally high, despite some moderation over the prior year driven by lower fuel prices. The requested base rate increase currently pending could improve the authority's margin of safety.
CHALLENGED SERVICE TERRITORY: The authority serves a geographically and economically challenged territory 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.
RATING SENSITIVITIES
ADDITIONAL LIQUIDITY STRAINS: Resolution of the Rating Watch Negative on the Virgin Islands Water and Power Authority will depend on WAPA's ability to restore its available liquidity to levels commensurate with its business risk and anticipated obligations. Further evidence of reduced capacity for timely repayment of outstanding debt service obligations, including diminished cash balances, no access to short-term credit or sizable unanticipated obligations related to pending litigation could result in further negative rating actions.
RATING STABILITY: Increased available liquidity as evidenced by an increase in unrestricted cash balances, increased 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.
CREDIT PROFILE
LIQUIDITY CONCERNS
WAPA's consistently low cash balances coupled with a persistent reliance on borrowings under its bank lines of credit to fund working capital remains a key credit concern for Fitch. The authority currently maintains bank lines of credit from Banco Popular of Puerto Rico (Long-Term Issuer Default Rating 'BB-' ) and FirstBank of Puerto Rico that mature on June 25, 2016. Approximately $18 million of the $20 million in total borrowing capacity has been drawn upon.
WAPA also maintains a $15 million overdraft facility with FirstBank as well as additional lines of credit to fund capital projects from both banks totaling $13 million. Approximately $21.5 million of the $28 million in available capacity under the additional lines has been tapped.
While the authority expects to secure an extension to the lines of credit prior to the expiration date, Fitch remains concerned over its ability to do so, as well as its ability to restore borrowing capacity.
LEGAL ACTION INITIATED
WAPA's prior fuel supplier, Trafigura Trading LLC (Trafigura), recently filed a complaint in district court alleging the authority failed to pay an outstanding balance of almost $25 million for prior fuel deliveries made during a portion of 2015.
WAPA changed fuel suppliers' midway through 2015 reportedly without satisfying any portion of the amount owed to Trafigura. The balance owed appears to be a primary driver in a sizeable spike in accounts payable to $74.6 million from $38.9 million exhibited in the authority's preliminary unaudited financial results for fiscal 2015.
The authority's failure to satisfy the obligation is especially concerning given its current strains on liquidity and growing receivables from the government. Earlier this year the USVI government received approximately $220 million from the sale of the Hovensa oil refinery. However, the V.I. government has reportedly allocated just $9.6 million to date to the authority in an effort to reduce a small portion of the approximately $44 million accumulated receivable it owes to WAPA. Moreover, the vast majority of the $220 million has reportedly been used by the V.I. government to fund other obligations, reducing the likelihood that any additional progress toward reducing the receivable and paying Trafigura will result from the Hovensa sale.
WEAK FINANCIAL PERFORMANCE
The authority's financial profile has weakened further in recent years, reflecting the confluence of inadequate cost recovery, declining sales and the continued financial strain attributable to overdue receivables from the government. Total government receivables nearly doubled from $25.5 million in fiscal 2013 to $46.9 million through Dec. 31, 2015.
Fitch calculated all-in debt service coverage declined to 0.83x in fiscal year-end 2014, although with the inclusion of fuel tax revenues, which are statutorily restricted for capex and debt service related to new generation projects, coverage improves to just under 1.2x. Total debt service incorporates outstanding general obligations notes, which are junior to the payment of senior lien and subordinated lien obligations of the electric system. Fitch calculated coverage of senior lien obligations alone was adequate at 1.53x in fiscal 2014 but significantly weaker on senior and subordinate obligations at .97x.
Liquidity, not including lines of credit available for working capital, remained low with just 13 days cash on hand at the close of fiscal 2014. Including the available lines of credit, liquidity improved modestly but remained weak at 23 days of liquidity on hand.
Cash flow and liquidity metrics, based on unaudited year-end financial results, remained largely unchanged in fiscal 2015, despite the non-payment of nearly $25 million in fuel costs to Trafigura. Total borrowing capacity under all available lines, including one for overdraft protection, is almost completely exhausted, further straining the authority's access to liquidity.
The Authority recently (December 2015) submitted rate cases for both the electric and water utilities that, if approved by the PSC, would take effect in July 2016. The additional electric system revenue would be used in conjunction with fuel tax revenues and proceeds from additional debt issuance to fund approximately $145 million in new capital projects, primarily related to new generating units.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002655
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002655
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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