WOONSOCKET – S&P Global Ratings lowered its long-term rating on Woonsocket’s water revenue bonds to “BBB+” from “A-” and removed the rating from CreditWatch, where it was placed with negative implications on Aug. 16.
However, the rating agency said the outlook on the bonds is negative.
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“The downgrade reflects reactive rate setting, resulting in financial erosion at the water fund before a recent large rate hike, compounded by poor transparency characterized by delayed audits and budgeting, which we view as governance weaknesses in risk management and transparency,” said S&P Global Ratings credit analyst Alan Shabatay.
The negative outlook reflects S&P’s concern that near-term financial performance could weaken further if recently approved rate increases are insufficient to cover rising operating costs and sufficiently fund capital reinvestment in the system, the agency said.
According to S&P’s rating scale, BBB means the bonds are still considered investment grade, but one notch from BB speculative grade.
This action comes just weeks after Moody’s Ratings withdrew the city’s bond rating because Woonsocket has failed to submit its fiscal 2023 audit, which allows rating agencies to gauge a municipality’s financial status.
Over the S&P’s outlook period, it said analysts will monitor to what extent proposed rate hikes are approved and implemented. The agency expects that the timeliness of the water system’s audited financial metrics will be uncertain until it receives additional audits. The rate hike in October will only begin to appear in fiscal 2025 financial results, S&P noted.
“There is a one-in-three chance we could lower the rating further if the system breaches its rate covenant or if sufficient rate increases over the outlook period are not adopted,” the agency reported.
If the upcoming 2025 request to the R.I. Public Utility Commission to raise rates is not accepted, and financial metrics continue to decline, the agency said it could lower the rating.
A downgrade could happen if additional debt is issued to address the capital improvement plan without rate increases to supplement increased debt service and if the financial situation deteriorates further.
“Finally, if the 2023 audit is not produced before the end of this calendar year, we would consider lowering and/or withdrawing the rating due to vulnerabilities in information quality and transparency,” S&P said.
“Before we would consider raising our rating, the utility would need to maintain higher coverage levels along with a buildup in the system’s nominal cash position to levels comparable with those of peers at a higher rating,” the agency said.
“This could happen if the water system’s 2025 rate proposal is approved,” the report said. “We could also consider raising the rating if the demographic profile materially improves. A potential upgrade is also contingent on the water system completing all necessary rehabilitation projects to reduce PFAS [per- and polyfluoroalkyl substances] and lead service line exposure in the service area.”
