Fitch Rates Virgin Islands Water & Power Authority 2007A & 2008A 'BBB'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns a 'BBB' rating to the Virgin Islands Water and Power Authority (WAPA) $15.3 million electric system revenue refunding bonds, series 2007A and $26 million electric system revenue refunding bonds series, 2008A (forward delivery). In addition, Fitch assigns a 'BBB-' rating to WAPA's $58.5 million electric system subordinated revenue bonds, series 2007B. Fitch affirms the 'BBB' rating on WAPA's outstanding senior electric system revenue bonds. The Rating Watch Negative is removed; the Rating Outlook is Stable. Both series are expected to be insured and will price during the week of June 6, 2007 with Citi as sole manager.

Proceeds from the 2007A issuance will advance refund a portion of WAPA's outstanding series 1998 bonds. Proceeds from the 2007B issuance will fund system upgrades and expansions, including the installation of a waste heat recovery boiler (WHRB) on St Croix on Units 16 and 20, and will pay down a portion of WAPA's line of credit ($10 million) used for capital additions. Once constructed, the WHRB is expected to improve WAPA's overall operational efficiency and generate $10 million in annual fuel savings (assuming that oil prices remain above $60 per barrel).

Key credit factors include:

Strengths

--Historically sound financial performance;

--Improved Island economy and the government's fiscal policies (general obligation (GO) - Rated 'BBB-');

--Autonomy from Virgin Island Government;

--Improved willingness of the Public Service Commission to provide timely recovery of fuel costs.

Concerns

--Tourism- based economy;

--Exposure to oil as sole fuel source;

--WAPA's relationship with the government and PSC while improved remains a key credit factor;

--Weather event (hurricanes) can disrupt service.

Fitch placed WAPA on Watch Negative on July 19, 2004, due to the potentially adverse credit impact of rising oil prices, an issue compounded by a Public Service Commission (PSC) decision to delay WAPA's recovery of fuel expenses (over 2 years), and concerns that this cost pressure could put increased pressure on the government's ability to meet its WAPA obligations. Since then, the PSC has taken explicit action to help WAPA address this uncertainty, primarily, by authorizing WAPA to recover its fuel expenses in its rates on a timelier basis while recovering its deferred costs over two years. At present, WAPA has recovered most if its deferrals and the PSC returned WAPA's fuel recovery to the historical six-month true-up (LEAC). Consequently, Fitch believes that WAPA's financial performance has stabilized and is supportive of the rating.

The Electric System Subordinate Bond Resolution has been established to preserve the senior lien minimum debt service coverage target of 1.75 times (x), provide WAPA with the financial flexibility to fund its capital plan prior to submitting a rate case to the PSC and offered investors with adequate debt service coverage of at least 1.50x on the subordinate bonds (PSC approved). The subordinate lien structure is not anticipated to materially affect the margins available for the general resolution bonds (senior bonds) or the 'BBB' rating. Given material differences between the senior and subordinate lien coverage levels, security provisions, and considering that WAPA is regulated by the PSC and does not have the ability to raise base rates quickly, Fitch feels a notching in ratings is warranted. It should also be noted that the senior lien and the subordinate lien remain open, and that while WAPA does not have current plans for addition debt in the near term, it is highly likely that given management's plans to improve its aging generation fleet, which has been historically dependable, that they will need to access the bond market in about five years.

WAPA's financial projections anticipate a $7 million rate increase in 2010. As a result, for the five year period of 2007 through 2011, projected senior debt service coverage ranges between 1.70x to 2.28x, combined senior and subordinate coverage ranges between 1.55x to 1.88x, and combined coverage including WAPA's LOC is between 1.41x to 1.81x. WAPA's ability to meet or exceed its current financial coverage (both senior and subordinate) and liquidity targets will remain essential to maintaining its credit ratings.

WAPA is the primary electricity provider for the U.S. Virgin Islands. WAPA's power system serves approximately 50,000 customers with sales consisting of 33% residential, 20% commercial, 43% industrial, and 4% other.

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