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Bond-rating Firm Puts WAPA on 'Watch Negative'

Aug. 2, 2004 – Fitch Ratings, a bond-rating company, has put the Water and Power Authority on a Rating Watch Negative, WAPA's executive director, Alberto Bruno-Vega, said on Monday.
The watch concerns only the utility's ability to float bonds for its electrical division. Its water division has junk-bond status, which means it has no rating.
Fitch Ratings wrote in a July 19 release that the Rating Watch Negative "reflects the adverse effect on WAPA of sharply higher oil prices, greater difficulty in recovering fuel expenses on a current basis, and a continuing poor record of collections from certain government agencies."
According to the Fitch Ratings Web site, a Rating Watch is issued "to notify investors that there is a reasonable probability of a rating change and the likely direction of such change." A watch negative indicates a potential downgrade.
No one could be reached for comment at Fitch Ratings.
WAPA's electrical division currently has a BBB rating, Bruno-Vega said. A rating of BBB, or "Good," according to the Fitch Ratings Web site, "is the lowest investment-grade category," falling below AAA, AA and A, but above BB, B and lower ratings.
If WAPA's BBB rating is reduced, Bruno-Vega said, WAPA will have to pay more to float bonds. "That means we'll all be paying for it," he said, referring to WAPA's customers.
Bruno-Vega said the most important reason Fitch Ratings sees for a possible downgrade concerns a Public Services Commission ruling that prevents WAPA from adjusting the fuel-cost surcharge on customers' bills monthly under the Levelized Energy Adjustment Clause, or LEAC. At present the PSC reviews the LEAC rate every six months.
The authority is working with the PSC's WAPA consultant in the hope of changing that stance, Bruno-Vega said.
However, Fitch Ratings said in its release that a change in the way WAPA calculates the LEAC surcharge is "unlikely in the near to intermediate term."
And, it said, "given recent changes in the PSC's willingness to allow timely recovery of deferred fuel costs, this relationship is in question and increases the regulatory risk associated with the electric system's credit."
Bruno-Vega said the PSC recently mandated that WAPA spread out the LEAC over three years. Previously, they were allowed to adjust it every six months.
Because fuel costs fluctuate, especially recently, WAPA is now $17 million in the hole for fuel, he said.
When the PSC set the most recent LEAC rate, it was estimated that oil would cost $34 a barrel, he said, but it's now $42 a barrel.
The other reason Fitch Ratings gave for its concern refers to the more than $15 million owed WAPA by V.I. government departments and semi-autonomous agencies.
"If we had a payment schedule by the government, we could have had a better rating," Bruno-Vega said.
He asked the Senate Finance Committee last week for a lump-sum appropriation to cover the payments owed from years past because departments and agencies are not allowed to pay such bills out of their current fiscal year budget.
He also asked the senators to put a line item in all department and agency budgets for the payment of WAPA electric and water bills; if that were done, the agencies would not be able to spend the appropriated money for any other purpose.
Fitch Ratings wrote that there has been some improvement in the V.I. economy, "but it still lags previous economic turnarounds, partly reflecting the negative effect that higher fuel prices are having on its service economy."
Bruno-Vega said that in the early 1990s WAPA had no rating from Fitch or the other two rating companies, Moody's and Standard and Poor.
Eventually, WAPA was able to convince Fitch to give it the lowest "investment grade" rating possible, a BBB-, Bruno-Vega noted.
Moody's and Standard and Poor eventually followed suit. Then, last year, Fitch upped WAPA's rating to a straight BBB. The Watch Negative is from only Fitch Ratings, not the other two ratings companies.
Keithley R. Joseph, Public Services Commission executive director, said the PSC could not comment on the issue because it is an ongoing matter. He referred calls to the PSC board chair, Valencio Jackson, who could not be reached for comment.

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