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Three ratings agencies upgrade LIPA bonds as it seeks new borrowing

The LIPA Power Plant in Northport on July

The LIPA Power Plant in Northport on July 1, 2019. Credit: Newsday/John Keating

Three major ratings agencies on Friday upgraded their ratings for LIPA as the authority goes to Wall Street for another $485 million in borrowing.

Fitch Ratings, Moody's and Standard & Poor’s cited LIPA’s improved financial metrics and controls, including a policy of keeping more cash on hand to fund operations, and reduced regulatory interference in upgrading the authority’s debt, which had traditionally been among the lowest-rated among national public utilities. All three rated LIPA’s outlook as “stable.”

Fitch, in a report issued Friday, cited LIPA’s “more robust operating cash flow” and a debt level that remains “nearly unchanged” at a little more than $8 billion in increasing its rating to A from A-minus. New debt issues were also rated A.

“LIPA’s very strong service area and its more disciplined approach to rate setting should sustain the authority’s very strong revenue defensibility and overall performance even through a period of moderate stress, further supporting its financial profile and the final rating,” Fitch said.

Fitch also cited LIPA’s “ongoing efforts to moderate costs and overall operating risk.”

LIPA chief executive Tom Falcone, a former Morgan Stanley banker who has led LIPA's financial overhaul since starting with the utility in January 2014, said the upgrades put LIPA "in the pack" with other large public utilities. 

“We have a plan to bring our debt burden in line with utility averages by the mid-2020s and with the highest rating in our history, we’re well on the way," he said Friday. 

Fitch also likes that LIPA isn’t directly regulated by the state Public Service Commission. Instead, LIPA must submit to “review and recommend” rate scrutiny by the Department of Public Service, which in 2015 recommended a 26.4 percent reduction of LIPA’s requested rates but also allowed the authority to implement “several rate adjustment mechanisms to offset variability in some of LIPA's largest expense items," including debt service and storm damage. Those mechanisms allow LIPA to raise or reduce rates to recoup those expenses. Fitch also notes that LIPA isn’t expected to propose another rate increase above the triggering 2.5 percent point “through 2021.”

Moody's, which upgraded LIPA from A3 to A2, cited the "continued improvement in LIPA's financial performance" and the strength of the economics of Long Island. It also cited "improved levels of operating performance and customer satisfaction" but said it doesn't expect LIPA to receive another upgrade "in the foreseeable future." 

S&P in its report Friday also upgraded LIPA’s rating to A with a stable outlook, citing the increased cash reserves that “require moderate rate increase” and the “extremely strong fundamentals” of LIPA’s service territory.

Those positives more than offset S&P’s concern over “projections that include adding almost $1.5 billion of debt over five years and the financial stress the utility might face as it complies with New York State's ambitious plans to decarbonize the electric sector.”

Falcone noted that LIPA will have paid off around $1 billion of debt over those same five years. 

Still, S&P said, “We view this highly leveraged utility’s financial profile as strong.”

That’s based on LIPA’s “ability to serve customers from a diverse mix” of power sources, including local plants, off-island cables and local renewable energy.

With more than $952 million of cash and investments at last year’s end and $345 million in credit line available to LIPA, S&P said it considers LIPA’s liquidity to be “very strong.” But tempering that position, S&P said, “are debt and liabilities that translate into a highly vulnerable posture.”

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