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I AGREE
28 Aug 2013
Approximately $294 million of securities affected
New York, August 28, 2013 -- Moody's Investors Service ("Moody's") today downgraded
the ratings for Virgin Islands Water and Power Authority (VIWAPA) senior
and subordinated lien bonds to Baa3 and Ba1, respectively,
from Baa2 and Baa3, respectively. The rating outlook remains
negative.
RATINGS RATIONALE
The rating downgrades and negative outlook reflect the persisting weakness
in VIWAPA's credit metrics and liquidity, along with a challenging
economic environment, including high unemployment and other weak
economic indicators compared to the United States averages. VIWAPA's
challenging credit risk fundamentals are exacerbated by the closure of
HOVENSA LLC's oil refinery operations on the island of St.
Croix during 2012 and the ensuing heightened dependence on rate increases,
which are subject to approval by the Virgin Islands Public Service Commission
(PSC), and a need for other cost saving initiatives to achieve improvements
in the utility's financial performance. Along these lines,
VIWAPA has arranged replacement fuel oil supply, obtained emergency
rate increases from the PSC and filed for additional base rate increases,
while trying to cope with challenges of the Virgin Islands' economy
and the government's longstanding history of slow payments to VIWAPA.
In late July, VIWAPA signed a contract with Vitol Group, a
global energy supplier, to switch to propane as the primary fuel
for power generation by the fall of 2014 to facilitate significant savings
on fuel supply costs. Although VIWAPA's lack of rate setting autonomy
is atypical for a municipal utility, there is a history of supportive
rate setting decisions from the PSC , albeit not without a lag period
which has contributed to the weak metrics and liquidity profile.
Although VIWAPA has been maintaining debt service coverage ratios to comply
with required levels in its bond documents, Moody's adjusted
debt service coverage calculations, which include cost items not
in the bond ordinance calculation, evidence substantially lower
levels of protection for investors. VIWAPA's recent contract
with Vitol advances its fuel diversification strategy, including
planned retrofits of existing generation plants to allow for use of liquid
propane gas (LPG) in the near term and ultimately liquefied natural gas
(LNG) in the medium term. VIWAPA is also adding renewable energy
sources and pursuing transmission interconnections with Puerto Rico and
the British Virgin Islands. Moreover, VIWAPA is continuing
efforts to better manage its longstanding exposure to slow collections
of government accounts receivable, taking steps to improve its weak
liquidity, and shoring up its system reliability. We observe
that financial pressures inherent for an island utility that serves a
large, low income population and a fuel mix currently dominated
by oil require VIWAPA to maintain a large power reserve margin.
The Ba1 subordinate lien bond rating reflects these credit risk fundamentals,
as well as the subordinate lien position of the bonds, the weaker
rate covenant and weaker debt service reserve requirement.
STRENGTHS:
*Electric System is a virtual monopoly provider of essential electricity
services to customers in the U.S. Virgin Islands
*PSC regulatory practices are generally supportive of credit quality,
albeit not without some lag period
*History of complying with bond ordinance defined debt service coverage
ratios
*Initiatives to diversify fuel sources (i.e.,
LPG and LNG) and reduce costs; improve accounts receivable management;
and improve liquidity
CHALLENGES:
*Lack of rate setting autonomy, which is atypical for municipal
utilities; ongoing need for rate relief to bolster debt service coverage
*Lingering concentration of exposure to fuel oil price volatility
while diversification strategy unfolds; higher fuel oil costs under
contract with Trafigura AG
*Large low-income population and slow paying Government;
weak economy
*Large energy reserve margin requirement due to island service area;
potential hurricane impacts on system plant and revenues
*Weak liquidity
Outlook
WAPA's negative rating outlook reflects VIWAPA's need to achieve
further progress in coping with credit challenges, including fuel
supply and cost pressures resulting from HOVENSA LLC's decision to cease
its oil refinery operations on the island of St. Croix.
Notwithstanding the increase in electric rates approved in 2012,
the need for additional support from the PSC in pending rate proceedings,
and anticipated fuel cost savings beginning in the fall of 2014 will be
heavily weighted rating factors going forward. The negative outlook
also reflects a need for VIWAPA to better manage slow collection of accounts
receivable and improve weak liquidity and debt service coverage.
What Could Change the Rating UP:
The rating is currently well positioned. However, the outlook
could change to stable if VIWAPA effectively addresses fuel supply planning
and cost challenges, reduces the amount of delinquent accounts receivable
on a consistent basis and achieves and then sustains stronger liquidity.
Moreover, supportive decisions in its pending electric and water
rate case filings, while also successfully diversifying its resource
mix to reduce vulnerability to the price swings in commodity markets would
be credit positive.
What Could Change the Rating DOWN:
The rating could be lowered if VIWAPA's financial position weakens due
to further regional economic decline and severely reduced electric revenues
resulting from HOVENSA's ceasing its oil refining operations on St.
Croix. Ratings could also be lowered due to less supportive regulatory
decisions in pending or future rate cases, a return to large increases
in delinquent government receivables, or any significant lag in
recovering its fuel cost deferral balance. The rating could also
be pressured if a hurricane or other natural disaster significantly reduces
economic activity and electric revenues without satisfactory offsetting
FEMA assistance.
RATING METHODOLOGY
The principal methodology used in this rating was U.S. Public
Power Electric Utilities with Generation Ownership Exposure published
in November 2011. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
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or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
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rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
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rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
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have affected the rating. For further information please see the
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kevin G Rose
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Chee Mee Hu
MD - Project Finance
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Virgin Islands Water and Power Authority senior and subordinated bonds to Baa3 and Ba1, respectively; outlook remains negative
No Related Data.
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