S&P GLOBAL RATINGS recently took a significant action regarding Woonsocket's water revenue bonds. Just weeks after Moody's Ratings withdrew the city's bond rating due to the failure to file the fiscal 2023 audit, S&P lowered its long-term rating on these bonds from “A-” to “BBB+” and removed it from CreditWatch with negative implications on August 16. The rating agency's concern lies in reactive rate setting that has led to financial erosion at the water fund before a recent large rate hike, along with poor transparency characterized by delayed audits and budgeting, which they view as governance weaknesses in risk management and transparency.
Negative Outlook and Its Implications
The negative outlook reflects S&P's worry that near-term financial performance could worsen if the recently approved rate increases are not enough to cover rising operating costs and fund capital reinvestment in the system. Analysts will closely monitor how much of the proposed rate hikes are approved and implemented over the outlook period. The timeliness of the water system's audited financial metrics remains uncertain until additional audits are received. It's important to note that the rate hike in October will only start to show in fiscal 2025 financial results.There is a one-in-three chance of a further rating downgrade if the system breaches its rate covenant or if sufficient rate increases over the outlook period are not adopted. A downgrade could also occur if additional debt is issued to address the capital improvement plan without rate increases to cover increased debt service and if the financial situation continues to deteriorate. Additionally, if the 2023 audit is not produced before the end of this calendar year, S&P would consider lowering and/or withdrawing the rating due to vulnerabilities in information quality and transparency.However, there is also a possibility of a rating increase. Before that could happen, 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. This could occur if the water system's 2025 rate proposal is approved. A potential upgrade is also contingent on the water system completing all necessary rehabilitation projects to reduce PFAS and lead service line exposure in the service area.