LIPA debt charge to drop, but impact small

Ratepayers probably won't feel the impact, but a charge tied to LIPA's 2013 plan to refinance and reissue $2.1 billion in old debt is about to drop by more than half -- to just under half a penny.

All PSEG Long Island bills contain a footnote reference to a "transition" charge tied to an entity called the Utility Debt Securitization Authority. Since March, the charge stood at 1.3 cents a kilowatt hour. But starting next year it will drop to $0.003814 cents.

According to documents filed last week by the Long Island Power Authority, charges and payments tied to the refinancing transaction are set to drop in 2015 to about $67.8 million from $182.7 million last year.

The "securitized" debt, from a transaction mandated in the LIPA Reform Act of 2013, set up a new entity called the Utility Debt Securitization Authority to issue new bonds to refinance old debt. The new bonds have considerably higher ratings than existing LIPA bonds because of strict guarantees written into them that provide for full repayment regardless of LIPA's circumstances, including bankruptcy.

By Dec. 15, the new debt authority will pay $180 million in principal and interest on the $2.1 billion debt. It will also charge ratepayers for a long list of expenses, including $1 million to LIPA as "servicer," $405,000 for insurance for the new authority's officers and directors, $110,000 in administration fees and expenses, $75,000 in accounting fees, $45,000 in rating agency fees, and $35,000 in legal fees.

In all, $182.7 million will have been recovered this year through the 1.3 cent per kilowatt hour charge.

But next year, the amount to be recovered will drop to $67.4 million, primarily because only $15 million in principal payments are due during the year (compared with $90 million this year). Other expenses also are set to decline.

Tom Falcone, LIPA's chief financial officer, noted in a statement that the 2013 securitization was designed "to help lower the authority's costs of providing electric service on Long Island. These savings are passed to customers each year in its delivery charge."

The securitization is a tiny portion of the delivery charge, and any changes to it are automatically offset by adjustments to the delivery charge, LIPA said.

For example, LIPA expects to have a higher interest expense level next year, according to its 2015 budget. Total interest expense for 2015 will jump to $367 million from the $352.7 million approved in 2014. LIPA said its average debt will remain at around $7.6 billion next year.

The debt strategy hasn't swayed two firms from lifting negative outlooks on LIPA. Fitch Ratings, in issuing an A-minus for a new LIPA debt offering of $799 million this month, kept a negative outlook in place, noting, among other things, that LIPA has more than $10.2 billion in long-term debt and power contracts, amounting to $9,173 per customer.

Standard & Poor's, in rating LIPA debt A-minus, issued a negative outlook over concerns about new state regulatory oversight of LIPA and that the $2.1 billion securitization transaction didn't result in lower customer bills, or lower overall debt--factors that "could perpetuate customers' and politicians rancor regarding the utility's rates and potentially constrain financial flexibility." Moreover, S&P said, debt added in 2014 "could dilute some of the securitization's debt-reduction benefits."

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.