The Long Island Power Authority's $7 billion-plus debt load is being recast from a villain to vital financial tool with the recent approval of up to $2.375 billion in new borrowings.
After years of working, and largely failing, to reduce the original $7 billion debt, LIPA officials this year will preside over a material increase in it, to an average $7.6 billion, compared with $7.2 billion last year, according to LIPA financial filings.
At the same time, the payoff amounts on long-term LIPA power contracts, technically a "liability" on its books, also are increasing. They soared to more than $2.5 billion last year, from $599.8 million in 2002. The contracts are long-term agreements to rent "capacity" from power plants and undersea cables that LIPA largely does not own.
SHIFT IN PHILOSOPHY
The breadth of the latest borrowing plan highlights a shift in philosophy at LIPA, where the long-criticized "mountain of debt" was blamed for contributing to high electric rates and limited flexibility. Now, the utility says, paying for system improvements and realigning short-term borrowings is better managed over time rather than short term, particularly with a rate freeze in effect.
Two weeks ago, trustees voted 5-1 to authorize the new borrowing to fund PSEG worker pensions, capital improvements and new computer systems that LIPA will not own. The borrowing also would go to pay off bonds and short-term credit accounts that are expiring next year. The financing also will pay the "fees and expenses" of Wall Street bankers, and interest on newly issued bonds, according to LIPA documents. One LIPA official suggested utility borrowing was nothing to be ashamed of. "It's in the water that LIPA must reduce its debt, but it's hard to understand" why, LIPA chief executive John McMahon told trustees at the committee meeting.
McMahon said that at "all utilities, you have to finance improvements in your system. You either do that by collecting it currently from customers or financing and collecting it from customers over time." He noted LIPA has acquired $2 billion in property, plant and equipment since its formation, while the debt level has remained steady at just over $7 billion.
However, former LIPA chairman and longtime trustee Howard Steinberg, who long railed against LIPA's debt, took issue with the notion of perpetually high debt levels.
"I still believe now as I did then that it's a significant issue and important to get the debt levels down," said Steinberg, who served as chairman from 2010 through 2012 and was appointed to the board in 1999.
"To reduce rates or to keep the rate of increase down is very hard to do unless you address the debt and property taxes," Steinberg said.
LIPA pays around $350 million a year in interest payments, a figure that inched up 6.3 percent this year. "It sounds like they have a very different philosophy than we had," Steinberg said.
Michael Mace of LIPA's outside adviser, Public Financial Management, said part of the plan involves converting short-term borrowings to longer-term debt, freeing up LIPA's ability to borrow more short term. As a result, he told trustees, overall "debt could go up because of that."
WHAT BORROWING WILL FINANCE
In all, up to $675 million of the long-term borrowing will be used for new PSEG computer systems, including a storm outage management system, the PSEG pension obligation, and other capital expenditures. LIPA said the board didn't authorize bonds for other operating expenses. It said it expects to pay 0.25 percent in costs to Wall Street and other firms tied to the new borrowings.
LIPA also will increase its cash holdings to $1 billion from a current $800 million, to help fund the PSEG operating contract and operations in emergencies.
LIPA finance chief Tom Falcone said none of the bond proceeds will go to fund operations. He said LIPA expects the new bank facilities to cost "approximately $1 million to $1.5 million less per year" than those that are expiring.
But some urged caution. Trustee Marc Alessi said he voted against the borrowing resolution because he was concerned that short-term operating costs were being converted to long-term obligations.
"I have a concern over borrowing long term for operating expenses," Alessi said.
WORRIES ON DEBT CONTINUE
Gov. Andrew M. Cuomo's original plan for LIPA recognized the debilitating nature of the debt. His Moreland Commission on public utilities originally recommended privatizing LIPA to reduce the debt by half -- using sale of the system proceeds to a private company to do so.
"The challenge associated with privatization would be to sell LIPA's assets and address its existing debt burden in such a manner that minimizes any potential increase in electric rates in LIPA's service territory," according to the interim report.
Ultimately, the LIPA Reform Act favored turning the system over to PSEG, and, separately, refinancing just over $2 billion of LIPA's old debt, while enlarging the overall debt $358 million last year, to $7.2 billion. LIPA's interest expense this year is $352.7 million, according to its approved budget -- up $21 million over last year.
Retiring state Assemb. Robert Sweeney (D-Lindenhurst), who introduced the LIPA Reform Act last year, worried that promises to retire LIPA's old debt keep getting obscured by new spending plans.
"It doesn't appear the debt will be going down anytime soon," he said. "It's a disappointment to me that, unfortunately, some things never change."
"We're like drunken sailors saying we're paying for this and paying for that, but no one ever asks how we're going to pay for it," said trustee Matthew Cordaro, who abstained from the vote.
Sheldon Cohen, chairman of the trustees' finance and audit committee, indicated the payback date was known. "So I guess we're planning in 2034, we're all going to celebrate when the amount of debt gets" reduced, he said, adding he would "put that on the calendar."