Pt. 1 – Debt, Losses, Credit Ratings and Rates
It will surprise no one to hear that finances at the V.I. Water and Power Authority are not good. But can it become sustainable? Is the news all bad or is there sunlight? And of cardinal immediate import: is raising the WAPA electric base rate 2.5 cents necessary or good, or unnecessary and bad for ratepayers?
Most of the basic facts have been widely publicized but widely disbelieved, or disregarded in the face of popular rage against expensive, sometimes unreliable electricity service.
WAPA’s internal documents, and the financial information contained in outside analyses paid for by the Public Services Commission and outside analyses from two of the three major international ratings agencies, all point toward raising the base rate as absolutely critical. All credible expert sources agree on this, even as elected legislators and appointed members of the Public Services Commission delay and resist the unpopular lifesaving measure.
Both Moody’s and Fitch specifically pointed to the base rate as a major factor in their decisions to signal future downward ratings movement. They pointed to cash flow deficits as the major factor that can readily be addressed.
In September, Moody’s Financial Services, one of the three main companies that decide how creditworthy countries and companies are, downgraded WAPA’s bond rating, pointing to all the familiar problems, from unreliable power to inability to pay vendors. Moody’s said three things would lead it to upgrade WAPA’s credit: more “liquidity” or cash on hand; more reliable electric service and “rate increases supporting improved cost recovery.”
Fitch, another of the three ratings agencies, put WAPA on “negative watch,” signaling that it might downgrade WAPA soon. Fitch mostly pointed to public calls for WAPA to seek debt forgiveness or debt restructuring. It turns out that not paying debts makes lenders very unwilling to lend more.
Fitch also explicitly hammered home the point, saying it was concerned about WAPA’s cash flow and liquidity, “particularly given the Virgin Islands Public Service Commission’s continuing reluctance to approve requested rate increases,” along with potential problems securing fuel – due to lack of money – and reduced demand for electricity since the 2017 hurricanes.
Both Fitch and Moody say they are concerned about reduced electricity sales too. In a recent interview, Kupfer estimated a 14 percent reduction in sales persists since the 2017 storms. Some of that is due to big hotels being offline.
“But about 10 to 12 percent we think is residential customer,” Kupfer said. WAPA doesn’t see a big difference in the number of residential customers from before and after the storms so they don’t have a good way to analyze the pre-storm and post-storm numbers, he said. Kupfer speculated people have been putting in more solar power on homes, buying more efficient replacement appliances to save money and conserving, he said. That trend may continue in the future as solar power gets cheaper and cheaper, leading more residents and businesses to go off the grid or use it less.
Fitch and Moody’s both cite concern that WAPA has a very high debt load too.
In early October, Kupfer told the Legislature WAPA had debts of around $550 million.
That includes outstanding utility bond debt of $252 million; post-hurricane federal community disaster loan debt of $95.5 million; bank credit lines of $38 million and $160 million in the Vitol capital lease for building the infrastructure to store Vitol propane, convert WAPA’s generators and upgrade the ports.
A 2018 Office of the Governor report on WAPA’s finances prepared with help from WAPA adds another $1.2 billion in unfunded pension and other post employment benefits, which also spurs creditors’ worries about WAPA’s solvency and ability to pay.
But future pensions are not costing interest today. Last year, WAPA paid about $58.2 million in interest and principal on its debt. That’s well over a third of WAPA’s total revenue that year. If everything else were fixed and the territory were given some free source of power that didn’t require WAPA to have any employees, do any work or buy anything, the debt alone would still cost Virgin Islanders $58 million a year: roughly $50 per month for every man, woman and child in the territory.
The Vitol lease is particularly expensive, accounting for $31.2 million in 2018. Kupfer put the annual Vitol costs at around $40 million in a recent interview.
For comparison, the neighboring British Virgin Islands, which also has a divided, albeit much smaller, electric system, also dependent on propane and diesel, currently has about $35 million in total debt; less than WAPA pays every year just to service its debt. The BVI system is much smaller, with one power plant, 15,250 customers and peak demand of 32 megawatts. WAPA has two completely independent grids on two different power plants, serving 55,000 customers with combined peak demands in excess of 100 megawatts. The government-owned BVI Electric Corporation’s entire debt appears to be due to a 2015 loan to purchase efficient Wartsila diesel generators.
What can be done about this debt? Some in the PSC, the Senate and the public feel this debt is the result of mismanagement. Is this so? And how much does it matter, if we have to pay up anyway?
Part 2 – Chronic Starvation