New York, July 05, 2016 -- Summary Rating Rationale
Moody's Investors Service (Moody's) has downgraded the Virgin Islands Water and Power Authority's (VI WAPA) senior electric system revenue bond rating to B1 from Ba2 and the electric system subordinated revenue bond rating to B2 from Ba3. The rating outlook is negative. This rating action concludes the rating review for downgrade that was initiated on March 31, 2016 and continued on June 2, 2016.
As of June 30, 2016 the authority had approximately $127 million in electric system revenue bonds outstanding and approximately $100 million in subordinated electric system revenue bonds.
The rating action is prompted by growing pressure on VI WAPA's financial longer-term prospects in light of the authority's direct exposure to economic stresses in the U.S. Virgin Islands and an inability to disconnect itself from local economic conditions, from the slow albeit improved payment pattern of governmental customers and a very high adjusted net pension liability (around $220 million). The amount of this pension liability, which approximates VI WAPA's funded debt, was disclosed for the first time in the Authority's 2015 financials, which were recently published.
The rating action also considers the authority's weak liquidity management characterized by the failure to extend drawn credit lines of around $23 million until their due date end of June 2016. Moody's understands that FirstBank Puerto Rico has extended its line of credit for one year and VI WAPA is still in negotiations with Banco Popular de Puerto Rico to extend the credit lines in the coming days. VI WAPA has historically relied on these credit lines to manage working capital and governmental receivables pressure. Should all of VI WAPA's lines of credit be extended, as we anticipate, undrawn availability under the lines is limited. Moreover, we estimate that VI WAPA currently has around $26 million of cash on balance sheet including the proceeds from the $13 million Rural Utilities Services (RUS) loan. VI WAPA's liquidity profile is further pressured by the need to repay its fuel supplier, Trafigura Trading LLC, past due amounts that approximate $25 million. While our expectation is that these amounts will be paid in small increments over an intermediate time frame, the repayment of these obligations add stress to the liquidity profile.
A positive for bondholders is that debt service on the senior lien and subordinated bonds benefits from a fully funded debt service fund and a fully funded debt service reserve fund which cover debt service by around 1.6 times. Moreover, we acknowledge the potential benefit to VI WAPA's credit quality from the incremental revenue growth if the Public Services Commission of the Virgin Islands (PSC) completes the pending base rate hearing process as well as an additional hearing of a previously denied emergency rate case filing. However, such revenue increases, should they occur, need to translate into a sustained improvement in liquidity and financial metrics. As a point of reference, while PSC approved rate increases have strengthened the Authority's financial performance, we calculate that Moody's fixed charge coverage ratio was below 1.0x for four of the past five years.
VI WAPA's rating recognizes the challenges of operating within an island economy with relatively sluggish growth, high unemployment and a narrow local economy that is dependent on discretionary tourism, and the ongoing struggle of the authority to cover its cost base and operate its facilities efficiently given significant excess capacity, the age of its equipment and high retail rates. The rating acknowledges the regulatory support the utility has received as it has progressed toward the near completion of a project to convert its base-load generation resources from oil-fueled to tri-fueled (initially propane), thereby lowering the cost of electricity for Virgin Islands ratepayers while reducing its deferred fuel balances. We view the completion of this project as an important milestone towards strengthening VI WAPA's long-term credit quality. That said, the conversion project, while likely to be completed this year, has been delayed and is substantially more costly than originally contemplated. VI WAPA faces a $150 million obligation to the contractor VITOL that will amortize over 10 years starting after the completion of the LPG/propane-based power generation project later this year.
The negative rating outlook reflects the authority's weak liquidity profile,which we believe will persist, assuming its existing credit facilities are refinanced, in the absence of incremental revenue growth and better liquidity management.
Factors that Could Lead to an Upgrade
A rating upgrade is currently unlikely. However the outlook could be stabilized in case of:
Successful refinancing of all outstanding credit lines
Rate increases supporting improved cost recovery and translating into better liquidity and the improvement of financial metrics with Moody's total fixed charge coverage ratio improving to 1.0x
Factors that Could Lead to a Downgrade
Further deterioration in VI WAPA's liquidity profile and financial metrics which threaten the long-term sustainability of the authority
VI WAPA's senior lien electric system revenue bonds are secured by a pledge of net electric revenues and certain other funds as defined in the bond resolution (water revenues are not pledged). The electric system revenue bonds have a rate covenant of 1.25x and a debt service fund requirement equal to the lesser of (i) 10% of aggregate bond proceeds, (ii) maximum aggregate annual debt service or (iii) 125% average aggregate annual debt service.
Use of Proceeds
VIWAPA is an independent governmental agency of the U.S Virgin Islands and was created in 1964. Its electric system is a monopoly provider of electric service to nearly 55,000 customers on St. Thomas, St. Croix, St. John, Water Island and Hassel Island. Its water system, although not a virtual monopoly provider, provides water service to more than 12,000 customers. Unlike the majority of publicly owned entities, the rates of both the electric and water systems are regulated by the PSC. The water and the electric system are independently financed with separate liens on net revenues securing the outstanding debt of each system. We only rate debt of the electric system and the authority provides separate accounting for each system.
Other Considerations - Mapping to the Grid
The grid is a reference tool that can be used to approximate credit profiles in the industry in most cases. However, the grid is a summary that does not include every rating consideration. Please see US Public Power Electric Utilities with Generation Ownership Exposure for information about the limitations inherent to grids.
The grid indicated rating for VIWAPA is B1 consistent with the assigned rating.
Based on three year average credit metrics.
Source: Audited financial statements for VIWAPA electric system, Moody's Investors Service
The principal methodology used in this rating was US Public Power Electric Utilities With Generation Ownership Exposure published in March 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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Moody's downgrades VI WAPA's sen. bnd to B1 and sub. bnd to B2; outlook negative
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007