Fitch Removes Virgin Islands Electric Bonds from Watch Negative; Assigns Negative Outlook

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has removed the Virgin Islands Water and Power Authority's (WAPA) senior and subordinate electric system bonds from Rating Watch Negative and subsequently affirmed the ratings at 'BBB' and 'BBB-', respectively. The Rating Outlook is Negative.

Removal of the Rating Watch Negative status reflects positive developments that have eased near-term financial pressures that could have adversely affected WAPA's investment grade rating. Specifically, the utility's regulator, the Public Services Commission (PSC) approved an 11% base rate increase, which is 67% ($9.739 million) of WAPA's $14.465 million request. The approved rate increase is expected to produce improved financial metrics (debt service coverage and cash liquidity) in fiscal 2010 and allow WAPA to begin replenishing depleted lines of credit used for working capital and capital expenditures.

Additionally, the PSC approved the utility's Levelized Energy Adjustment Clause (LEAC) to adequately recover current fuel costs and to begin payment of a $40 million loan used to cover cost from the 2008 fuel cost run-up. Fitch also notes that a reduction in current fuel prices compared to 2008 should be reflected favorably in WAPA's lower overall retail rates resulting in improved cash flow from customers to the utility due to lower cost pressures. To that end, accounts receivables as a percent of total revenue reduced to 6.8% in 2009 from approximately 11% in 2008, which includes notable progress in payments from the government.

As Fitch expected, unaudited fiscal year end June 30, 2009 financial results deteriorated from 2008 since the PSC-approved rate increases were implemented in fiscal 2010 (July 1, 2009). Specifically, the 2009 operating margin of negative 0.02% was driven by a decline in kWh sales of 5.5%. Fitch's calculation for the aggregate debt service coverage ratio is 0.92 times (x). However, the utility made its 2009 debt service payment and exceeded its legal coverage requirements of 1.25x for senior debt and 1.15x for subordinate debt when certain adjustments are taken into consideration. Favorably, the utility's 2009 cash position improved to $13.5 million (equal to 20 days) from $8.8 million (equal to 14 days) in 2008.

The Negative Outlook recognizes that improving cost recovery, stabilizing cash flow, and building self-liquidity will take time. Continued system efficiencies through expense reductions and more economic dispatch of generation resources along with expected base rate increases are needed to achieve sustainable financial performance that is in-line with an investment-grade rating. Fitch also notes that WAPA is making progress toward its fuel diversification goal, which should help to reduce its exposure to volatile oil prices. The PSC recently approved a purchase power agreement to provide WAPA with the output from a bio fuels plant owned by Alpine Energy Group, a private power project developer. Permitting and construction are expected to begin in 2010 with commercial operation of two units totalling 30MW by 2013 in St. Thomas and St. Croix. Fitch will also monitor whether the PSC approves rate adjustments to recover costs already incurred by the utility for this project.

Potential downgrade triggers include:

--Financial performance that does not meet current projections;

--PSC's reluctance to provide timely rate recovery of system costs.

Potential triggers for a return of the Rating Outlook to Stable include:

--Continued progress toward a constructive regulatory environment in which the PSC allows WAPA to recover fuel costs in a timely manner through the LEAC and approves appropriate base rates to adequately meet the utility's operational needs and support an investment-grade rating;

--Sustained financial performance with debt service coverage above 1.5x (all debt), liquidity as measured by days cash on hand trending over 30 days, and sufficient availability of lines of credit to support working capital and capital expenditure needs;

--Improved operational efficiencies as a result of commercial operation of the waste heat recovery boiler (currently delayed), and improved cash flow with the implementation of a surcharge for the facility's use.

VI WAPA is the primary electricity provider for the U.S. Virgin Islands (St. Thomas, St Croix, and St. John). WAPA's power system serves 53,654 customers with sales consisting of 35% residential, 16% commercial, 47% industrial, and 1.5% other.

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