February 6, 2017 / 4:24 PM / a year ago

Fitch Downgrades Virgin Islands WAPA's Sr. and Sub Lien Bonds; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, February 06 (Fitch) Fitch Ratings has downgraded the ratings on the following U.S. Virgin Islands (USVI) Water and Power Authority (WAPA) revenue bonds: --$118,850,000 electric system revenue bonds, series 2012A, 2010A, 2010B, 2010C, 2003 to 'CCC' from 'B+'; --$96,800,000 electric system subordinated revenue bonds, series 2007A, 2012B, 2012C to 'CCC' from 'B'. The Rating Outlook remains Negative. 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. Outstanding senior and subordinate lien bonds are also secured by cash funded debt service funds and fully debt service reserve funds. Combined, the funds had a total balance of approximately $36.4 million at the close of fiscal 2015 (the latest information available), equal to approximately 1.6x the scheduled annual debt service obligation due in fiscal 2018. KEY RATING DRIVERS INCREASED RISK OF DEFAULT: The rating downgrade reflects the heightened credit risk as a consequence of WAPA's continued inability to gain regulatory approval of rate relief needed to address its exceptionally weak cash flow and liquidity. A rate increase that was authorized in January 2017 but then subsequently rescinded by the Virgin Islands Public Service Commission (PSC) evidences an unsupportive relationship that compounds the authority's consistently low unrestricted cash reserves (estimated at five days of cash on hand), exceptionally high government receivables and fully depleted borrowing capacity under its lines of credit. LIQUIDITY CHALLENGES REMAIN: The Negative Outlook reflects Fitch's concern that WAPA's capacity for timely repayment of outstanding service obligations remains challenged. Exacerbating WAPA's operating pressures is a lawsuit initiated in 2015 by the authority's former fuel supplier alleging failure to pay almost $25 million in fuel delivery charges. Moreover, Fitch does not believe any meaningful progress towards reducing receivables attributable the USVI government (Issuer Default Rating 'B'/Rating Watch Negative) is likely given the significant financial and economic pressures confronting the USVI. 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 EVIDENCE OF RESTRUCTURING OR DEFAULT: Any evidence that a restructuring of, or default on, outstanding debt of the U.S. Virgin Islands Water and Power Authority (WAPA) is probable, including the passage of enabling legislation or an inability to meet near-term liquidity demands, could result in further negative rating action. NEGOTIATED RESOLUTION TO LIQUIDITY CHALLENGES: Any negotiated resolution to the near term liquidity challenges facing WAPA, including long-term rate relief, reinstatement of bank borrowing capacity or repayment of overdue governmental receivables would be evaluated for commercial reasonableness and sustainability, and could lead to consideration of a higher rating. CREDIT PROFILE STRAINED RELATIONSHIP WITH PSC - RATE RELIEF IN QUESTION The authority was finally granted an interim rate increase of roughly 18% (for residential users) on Jan. 12, 2017 after having rate cases for WAPA's electric and water utilities that would have taken effect at the start of fiscal 2016 initially denied by the PSC in June 2016. The rate increase was scheduled to take effect on Feb. 1, 2017, seven months into the current fiscal year and almost a full year beyond when the initial request for rate relief was made to the PSC. Authority officials estimated the higher rates would yield approximately $14.5 million annually (according to news accounts) needed to stabilize WAPA's financial position, provide funding for operating and capital investment needs including new generation, and avoid technical defaults on bond covenants. Just two weeks later, the PSC rescinded the interim rate increase. In response, WAPA stated publicly that the PSC action was taken without notice to the authority, that the PSC exceeded its authority and that it would move forward with implementing the higher rates. Even with the rate increase implemented, Fitch believes the highly strained relationship with the PSC is likely to further impede WAPA's ability to recover costs and restore liquidity to a sufficient level. For additional information on U.S. Virgin Islands Water and Power Authority please see Fitch's press release of Oct. 3, 2016 at www.fitchratings.com. Contact: Primary Analyst Christopher Hessenthaler Senior Director +1-212-908-0773 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Dennis Pidherny Managing Director +1-212-908-0738 Committee Chairperson Marcy Block Senior Director +1-212-908-0239 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Revenue-Supported Rating Criteria (pub. 16 Jun 2014) here U.S. Public Power Rating Criteria (pub. 18 May 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018627 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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