LIPA debt projected to rise substantially as PSEG takes over
The Long Island Power Authority expects to end next year with one of the highest debt levels in its history -- $7.76 billion, including new short-term borrowing to fund start-up operations of PSEG as the Newark company takes control of the region's electric grid, according to a proposed 2014 budget trustees will vote on Tuesday.
The debt anticipated by the end of 2014 compares with a 2013 budget that projected debt of $6.83 billion by this year's end, including short-term borrowing.
LIPA and its newly formed Utility Debt Securitization Authority, a body formed under Gov. Andrew M. Cuomo's LIPA Reform Act, plan next year to issue more than $900 million in total debt, some of it to remain on LIPA's books until 2044, according to the budget.
The projected debt surpasses the reported borrowing in the authority's 12 years of audited financial statements. In 2001-02, long-term debt was reported to be just over $7.5 billion.
$200M for PSEG takeover
LIPA spokesman Mark Gross noted that the total debt next year includes short-term borrowing of about $200 million to prepare for the service contract with PSEG-Long Island, which will take near-total control of the grid in January, including storm response, billing and system maintenance and repair.
The money will be drawn from LIPA's credit line, and is included in the final debt numbers because LIPA still must pay interest on the amount.
LIPA also is borrowing to pay for electric-system improvements and storm hardening. Excluding those costs, Gross said, next year's debt will average around $7.4 billion. LIPA now has no short-term debt on its books, he said.
Gross also said the utility had changed its "focus" from "a reduction in total debt to a reduction in debt service costs."
Michael Taunton, LIPA's chief financial officer, said he expects the long-term debt, excluding the short-term borrowing, to remain relatively stable in coming years, and that new debt was necessary to fund essential infrastructure projects.
The 2014 budget notes that as a result of a debt refinancing expected to be completed in December by the securitization authority, LIPA is projected to save about $15.7 million in interest expense in 2014, and $28.7 million more in 2015.
But the savings will be more than offset by growth in total borrowing, including short-term loans. Total interest expense for 2014 will jump by $21 million, to $352 million, a 6.3 percent increase from 2013, according to the budget.
One LIPA trustee said the expansion of LIPA's debt is one reason he is likely to abstain from approving the budget at Tuesday's meeting.
"There were promises made that there would be a better plan to manage and reduce debt," said LIPA trustee Matthew Cordaro. "But rather than reduce it, they're expanding it. That perpetuates the problem, if not expands it."
The growth in LIPA's debt -- long blamed for the utility's high electric rates -- comes even as the authority works to reduce its borrowing costs by restructuring old debt and issuing new bonds at lower rates. Cuomo, in a statement announcing passage of his LIPA Reform Act this summer, said the goal was to reduce the "cost" of LIPA's debt. About $1.5 billion in old debt is expected to be refinanced as a result.
Of the $915 million in new borrowings, $460 million will be refinancing of some existing debt.
The remaining $455 million in new borrowing will be used for system improvements and new purchases, according to Taunton.
About $200 million of that will go to new computer and interactive voice response systems to be used by PSEG-Long Island to improve LIPA's customer service, fortifying equipment against storms and improving the peak-load system.
Some $33 million will go toward licensing and other costs tied to a newly planned 700-megawatt-plus power plant called Caithness II.
Lawmaker is surprised
Assemb. Robert Sweeney (D-Lindenhurst), who sponsored the bill to overhaul LIPA, was surprised to hear of the higher debt.
"Certainly there was an expectation that at the very least there wasn't going be an increase in the debt, which was blamed for the very high rates," Sweeney said. "It doesn't bode well for the rate in future years."
LIPA, under new operator PSEG-Long Island, has committed to a two-year rate freeze.
A spokesman for Cuomo declined to comment.
Gross, the LIPA spokesman, said even as LIPA increases its debt, "We will continue to seek help from our federal and state partners to offset these costs wherever possible." LIPA recently applied for $50 million in grants to help pay for a $40 million outage-management computer system to be installed next year by PSEG.
Also Tuesday, LIPA trustees are expected to consider a settlement with National Grid that could obligate the utility for hundreds of millions of dollars in additional liabilities. The proposed settlement, listed on a LIPA agenda, involves pension and other benefits for retired utility workers.