A recent decision by the Public Services Commission to delay acting on a base rate increase requested by the V.I. Water and Power Authority has contributed to the downgrading of the authority’s bond rating by Moody’s Investor Services, officials announced Friday.
A press release from WAPA on Friday said the downgrade “was eminently expected, given the continued downward spiral of the public utility’s finances and the challenge of stabilizing its financial footing.”
“In light of last week’s decision by the Public Services Commission to delay action on a requested emergency rate increase, resulting in WAPA’s inability to amass sufficient days of cash on hand, the rating downgrade, originally scheduled for June 6 but acted on Thursday, was largely anticipated,” WAPA’s acting Executive Director Julio Rhymer said in Friday’s statement.
According to the release, WAPA’s senior bonds were downgraded from Baa3 to Ba2, while the rating on its subordinate bonds moved down from Ba3 to Ba1. The announcement by Moody’s follows a statement by Fitch Rating Agency that, “WAPA is in a precarious position based largely on outstanding receivables, the lack of liquidity and a multimillion-dollar lawsuit recently brought by a former fuel supplier.”
Fitch put the authority on negative watching, saying in its report that WAPA’s lack of liquidity and high levels of borrowing on existing credit lines, along with an unstable economic climate in the territory and other things, led to the decision.
“While the authority has received a payment of just over $8 million from the government for past due obligations of the territory’s hospitals, the rating agencies are interested in seeing a pattern where WAPA develops a constant revenue stream to liquidate its debt as opposed to one-time payments,” Rhymer said.
He added the two-notch drop in the authority’s credit rating from Moody’s does not bode well for WAPA on the bond market. The bond rating slippage began a few weeks ago, with Moody’s noting that WAPA should have, at minimum, 45 days of cash on hand at an estimated value of $34 million. A proposed 2.687 cents per kilowatt increase that would have allowed WAPA to build the 45-day reserve over a two-year period was postponed by the PSC.
At the same time, the territory’s hospitals along and of the government’s semi-autonomous agencies continue to owe WAPA millions for past electrical and potable water service, Rhymer said. “These agencies are not current and have sizeable outstanding balances. WAPA is literally subsidizing their operations while our finances deteriorate.”
The base rate increase was approved by WAPA’s board during a meeting on May 19. At the time, Rhymer told the board the increase is necessary because WAPA has not been able to keep sufficient cash on hand to avoid downgrading by the Fitch Rating Agency and earning a negative watch status from Moody’s.
The credit rating agencies have been concerned with the liquidity of the V.I. government for a “long time,” Rhymer explained at the meeting. Further downgrading would limit bond sales and purchasing power. WAPA then would be required to obtain a $15 million secured line of credit that Rhymer said is unlikely to be approved by any bank without security.
And with the low credit ratings, the cost of any credit lines that are approved would be expensive, passed onto the customer and result in increased rates for WAPA services, Rhymer said.
Despite the warnings, PSC members voted at a meeting on May 27 to forward WAPA’s petition for a base rate increase to a hearing examiner, who will have up to 60 days to submit a report on the request. While Rhymer attempted to break down the circumstances, PSC board members said that WAPA’s financial position has been a longstanding issue and that the commission has recommended for years that the authority work on building its cash reserves.
On Friday, Rhymer said that despite the downgrade, efforts will continue to solidify the WAPA’s financial condition.
“Our action plan includes a commitment by the administration to continue addressing the outstanding streetlight obligation, which has been significantly reduced, and the obligations of the territorial hospitals; a strategy to right-size the authority and the building of operational reserve — setting aside funds of about $34 million dollars over two years — funds that can be used in the event existing lines of credit are called for immediate repayment,” he explained.