Standard & Poor’s and Fitch held ratings steady for two pending LIPA debt offerings, but signaled future ratings could increase if LIPA continued on firmer financial footing.
The Long Island Power Authority, which received an upgrade from Moody’s Investors Service earlier this month, has been working to raise an industry-low credit rating by moderating future borrowing, getting state approval to hike delivery rates, adding periodic rate-adjustment clauses and collecting more cash to pay for system upgrades.
Fitch noted a stumbling block for LIPA is its overall debt, currently about $7.7 billion, or about $9,337 per customer, including long-term power contract obligations.
S&P said the continued stable outlook for LIPA debt reflected optimism over state approval last year of a three-year rate increase plan, which will increase the delivery charge on bills by a cumulative 7.5 percent by 2018.
S&P also viewed favorably LIPA’s new ability to adjust rates periodically if revenue falls below projections because of unexpected weather, green-energy power reductions, union negotiations and the success of debt offerings. S&P likes LIPA’s ongoing plan to pay more of future infrastructure projects from cash collected in rates rather than taking on future debt, a strategy known as coverage.
S&P said it would consider raising the rating if LIPA were to “materially strengthen” those coverage ratios in the future.
On the other hand, S&P said ratings could be restrained by increased spending, the potential for more debt and “ratepayer resistance to further rate increases,” each of which could lead to a ratings downgrade if conditions worsened.
A senior LIPA official said Fitch and S&P “know where we’ve come from, which is that debt levels are high, and they are looking for evidence we’re going to bring them down.”
LIPA used to fund from 80 percent to 90 percent of its infrastructure projects through debt, he said, a figure that’s been cut to between 50 percent and 64 percent.
“The good news is that all three are saying that we’re doing things that are moving us in a fiscally prudent direction,” the official said.
Fitch, noting that LIPA benefits from “sound utility fundamentals,” said the utility appears to be helped by elements of the LIPA Reform Act. That allowed it to shift debt to a new entity called the Utility Debt Securitization Authority, which brought lower interest rates because the debt is now “nonbypassable,” even through bankruptcy proceedings.
The LIPA official noted UDSA financings, including a $469 million issue earlier this month, are on track to save ratepayers $446 million through lower interest rates — savings that are helping fund the coverage plan and offsetting what would have been higher rates. The latest issue, at a 2 percent interest rate compared with a previous 4.6 percent, will save $71.6 million.
But Fitch warned that added regulatory oversight “could affect LIPA’s financial and rate flexibility over time.” Several state lawmakers are seeking to strengthen the reform act, including to place LIPA and PSEG under full Public Service Commission authority, to limit debt and to have the state comptroller review finances.
In addition, Fitch said, “Despite electric rates that have become more competitive regionally, political and consumer rate pressures persist as LIPA’s average residential revenue per kilowatt-hour remains among the highest in the nation . . . ”
Fitch said LIPA’s debt levels, including obligations for long-term power-plant contracts, “remain high, totaling $10.2 billion” at last year’s end. Even though $4.1 billion was shifted to the UDSA, Fitch said, “the repayment profile remains an obligation and burden of current ratepayers.”
Fitch noted that LIPA’s debt per customer of $9,337, including those lease obligations, is “well above” the $3,318 median of similar utilities.