WAPA Confronts Financial Crisis With Strategic Moves and Federal Support, ‘Achievable,’ Says Knight

WAPA needs at least $375 million over the next five years to stay operational and address its mounting debt. A new report from Ernst & Young (EY) lays out the full extent of the utility’s financial challenges — and the tough decisions ahead.

Despite the daunting numbers, WAPA CEO and Executive Director Karl Knight remains optimistic. “I think that is achievable,” Knight said in an interview with the Source, emphasizing the need for strategic financial planning. “This is not a deficit we have to overcome tomorrow, but it is something that we have to put thought into.”

Knight acknowledged that while there were no surprises in the EY report, it serves as an important consolidation of financial information. “There’s a sense that this is all the information compiled in one place where we can look at it. This is what the Senate asked for — an assessment by a turnaround management company. It provides a fresh set of eyes and a third-party perspective,” he said.

The report underscores that WAPA’s financial position is unsustainable under current conditions, with projected cash losses of $170 million, $87 million in past-due vendor bills, $27 million in deferred maintenance, and $88 million in outstanding debt by 2030. Moreover, additional risks — such as fluctuating fuel costs and system vulnerabilities — could push the total funding need to $498 million.

Debt Burden Far Exceeds Industry Standards

A key concern highlighted in the EY report is the staggering size of WAPA’s debt compared to industry standards. Typically, utilities carry a debt load that is about 5.5 times their annual earnings before expenses (EBITDA), meaning they could pay off what they owe in a few years under normal operating conditions. By contrast, WAPA’s debt is 945 times its annual earnings, making it, according to the report, nearly impossible to pay off through normal revenue.

Additionally, while most utilities have debt that amounts to about twice their yearly revenue (2.1x revenue), WAPA’s debt is 0.80 times its annual revenue — which may seem lower, but due to WAPA’s ongoing financial losses, it is still unsustainable. Unlike well-managed utilities that use their revenue to gradually reduce debt, WAPA relies on external funding and loans just to keep operating. Without significant restructuring, the utility will remain in a cycle of borrowing to cover basic expenses, according to the report.

“We don’t have an investment-grade credit rating right now, which means refinancing will be challenging,” Knight admitted. “But that’s part of why we’re bringing in a municipal financial adviser — to help us explore all options available to us.” The adviser will assess WAPA’s refinancing options, identify potential sources of relief, and help WAPA become a viable player in the credit market again.

Hiring a Municipal Financial Advisor to Improve Credibility and Stability

The hiring of a municipal financial advisor is a common practice among utilities facing debt restructuring. Municipal advisors play a crucial role in guiding public utilities through complex financial strategies, including debt consolidation, bond refinancing, and market positioning.

“We do have to start looking at the credit market again, and we need to see if there’s an opportunity to refinance some of our debt,” Knight explained. “We’ve been operating in the last few years without a municipal fiscal adviser, and it’s time to correct that. We want to secure an adviser who can help us consolidate debt, negotiate financing options, and ensure that when the opportunity presents itself, WAPA is positioned to take advantage of it.”

Knight also emphasized the importance of restoring investor confidence by resuming regular audited financial statements and maintaining clear communication. “We released an EMMA filing this past month, and we want to get back to a process of releasing monthly filings — keeping our investors aware of our progress,” he said. The goal is to improve WAPA’s standing in the credit markets and create a stronger foundation for future financing opportunities.

The Electronic Municipal Market Access (EMMA) system, managed by the Municipal Securities Rulemaking Board (MSRB), is the official database for municipal bond information. Utilities and government agencies use EMMA to provide transparency in their financial dealings, allowing potential investors to track credit health, bond issuances, and other financial disclosures. By committing to regular EMMA filings, WAPA, according to Knight, aims to rebuild credibility in the financial markets and improve its ability to secure new funding opportunities.

Turnaround Plan: Next Steps in Ernst & Young’s Engagement

WAPA’s engagement with EY is part of a three-phase turnaround plan mandated by Act No. 8471, which the Virgin Islands Legislature passed in 2021. The law required a turnaround management company to conduct a full evaluation of WAPA’s finances and operations, providing a structured approach to guide the utility toward stability.

• Phase one, now complete, involved a comprehensive assessment of WAPA’s financial health, analyzing outstanding debts, energy plans, operational costs, and potential risks. The Jan. 30 EY report represents this phase, offering a baseline for future improvements.
• Phase two, set to begin in the coming months, will focus on developing recommendations to address the identified challenges. EY is expected to propose cost-cutting measures, revenue strategies, and debt restructuring plans to improve WAPA’s long-term outlook.
• Phase three will involve decisions on whether to implement EY’s recommendations, including potential changes beyond the Levelized Energy Adjustment Clause (LEAC) and other revenue-generating strategies.

The Virgin Islands Public Finance Authority (VIPFA), chaired by Gov. Albert Bryan Jr., selected EY to carry out this turnaround process. Knight emphasized that this plan is an essential step in breaking WAPA’s cycle of debt and operational inefficiencies.

Strategic Projects and Operational Improvements

While the financial situation is dire, several key initiatives underway to improve WAPA’s operations and long-term sustainability are not factored into the report, according to Knight, who described the assessment as more of a snapshot of past WAPA. Along with the recent commissioning of four new Wärtsilä generators, Knight said:

• Solar Energy Expansion: Another solar farm is nearing completion.
• Fuel Cost Reductions: WAPA has issued an RFP to renegotiate costs for liquefied petroleum gas (LPG) and secured a contractor to renegotiate diesel fuel costs.
• Billing and Metering Improvements: WAPA is making critical investments in modernizing billing and metering systems to improve collections and reduce inefficiencies.

Knight believes these steps will reduce operational deficits and help stabilize WAPA’s finances. “There are things happening that I think will ultimately show a path forward — still very positive,” he said.

Another major component of WAPA’s long-term recovery strategy is the use of federal funds, particularly through FEMA’s investment in replacing outdated infrastructure.

In the past three years, WAPA has secured significant federal funding to modernize its infrastructure and improve service reliability. In June 2024, FEMA approved the replacement of the Richmond Power Plant on St. Croix and two generating units at the Randolph Harley Power Plant on St. Thomas. These upgrades are expected to modernize power infrastructure, improve reliability, and incorporate more renewable energy sources.

However, recent federal actions have raised concerns about the future of FEMA funding. A potential elimination of FEMA, as reported by national news in past weeks, could disrupt federally backed infrastructure projects and shift the financial burden of disaster recovery and infrastructure upgrades to local governments.

“We’re moving forward with all pistons firing,” Knight said. “I think our funds are secured, but the projects on the drawing board need to move into reality. We still have to be smart — making sure we have the right advisers, consultants, and teams in place to dedicate their full attention to these initiatives.”

Why Rates Can’t Be Reduced Immediately

While some customers may expect immediate relief on their energy bills following WAPA’s latest efforts, Knight made it clear that rate reductions aren’t possible in the near term due to the utility’s ongoing financial challenges.

“Passing on rate savings from Wärtsilä’s new generating units, for example, isn’t something we can do right now,” Knight said. “We still have a financial hole to dig ourselves out of.”

Instead, he explained that WAPA’s focus right now is twofold, including reducing the operational deficit month by month to ensure that revenue consistently covers day-to-day expenses and addressing outstanding payables, deferred fuel balances, and vendor debts, which Knight described as a multiyear process that will take at least two to three years to stabilize.

“Our goal is to get to a place where we can operate efficiently and pass savings along to customers,” Knight said. “But for now, the priority is ensuring that we don’t slip further into financial instability.”

And, as WAPA moves forward with its three-phase turnaround plan, Knight emphasized that the utility must remain focused on long-term investments that will lead to sustained cost reductions and emphasized that the municipal financial adviser will play a critical role in determining when and how savings can be passed on to customers without compromising the utility’s ability to meet its financial obligations.

“In the short term, our customers may not see an immediate drop in rates,” he said. “But everything we’re doing now is aimed at ensuring that we never find ourselves in this kind of financial crisis again. Yes, there is a hole we need to dig ourselves out of. But this report provides a solid baseline of where we are — and, more importantly, where we need to go from here.”

Editor’s Note: The Ernst & Young report was submitted to the Office of the Governor, the Virgin Islands Public Finance Authority (PFA), and Senate President Milton Potter’s office on Jan. 30. Efforts by the Source to obtain the report were initially redirected to the PFA, which stated that it would need to be acquired from Government House. However, Government House Communications Director Richard Motta indicated that he first needed to obtain a copy from the PFA. The Source ultimately secured a copy of the report last week through an industry-published website, which also released an analysis of the findings on Monday.