Wall Street ratings firm cites potential risk of fully public LIPA
Fitch Ratings released the report this month affirming LIPA's "A" rating as the utility prepares to seek $345 million in new borrowings on Wall Street. Credit: Newsday / Steve Pfost
A Wall Street ratings agency cast a wary eye on the potential risk of a fully public LIPA, withholding a ratings upgrade until there’s more certainty about the authority’s future structure, according to a report.
However, the Long Island Power Authority received overall good news in the report by Fitch Ratings, which described LIPA’s outlook as “positive” given financial improvements at the utility, including having more cash on hand and more mechanisms to recover costs through rates.
Fitch released the report this month affirming LIPA's "A" rating as LIPA prepares to seek $345 million in new borrowings on Wall Street, and potentially billions more in coming periods.
Deeper in the Fitch report is a line that suggests a level of uncertainty about the authority’s prospects as a fully public entity as the State Legislature launches a commission to explore a fully autonomous LIPA. Assemb. Fred Thiele (D-Sag Harbor), co-chair of the commission, said it is seeking an executive director for a special advisory committee and committee members before tackling a draft report on the structure that is due by year’s end.
Fitch said an upgrade of LIPA is “unlikely prior to a final decision related to the future management of the authority’s assets.”
Asked to elaborate, Fitch analyst Dennis Pidherny told Newsday that holding off on an upgrade, which would make LIPA’s debt higher-grade for the offering, “is because we think that assuming direct control [by LIPA] is automatically riskier.”
“It’s just that doing so is such a fundamental shift that we would want to fully vet the strategy,” Pidherny said in an email to Newsday. LIPA's contract with PSEG Long Island, which manages the electric grid, runs through 2025.
LIPA and proponents have been largely positive about the utility’s prospects as a stand-alone utility without management by an outside entity, as is the current public-private model with PSEG Long Island. LIPA reports have found it can save more than $800 million over 10 years under the public model, which would largely eliminate the roughly $80 million LIPA pays PSEG each year to manage the system.
There are other potential cost savings as well, as LIPA itself develops more expertise in-house for operating the grid, managing power assets, and running finance and human resources.
Thiele dismissed Fitch’s concerns.
“Financial markets abhor any uncertainty that might affect LIPA future operations,” he said. “However, over the long haul, the reform of LIPA to a management model that will improve transparency, accountability and oversight will make LIPA stronger financially.”
Assemb. Keith Brown (R-Northport), called the Fitch action “ridiculous.”
“Fitch should base the rating with how LIPA is comprised now,” he said. As for the future structure of LIPA, Brown said, “I would say everything’s on the table to figure out the model for delivering power to Long Island ratepayers. Most important is oversight from the Public Service Commission, dealing with LIPA’s lingering debt, and making sure there are no golden parachutes” when or if LIPA switches over.
Elsewhere in Fitch’s report, the ratings agency expressed somewhat less concern about LIPA’s high debt levels ($12.8 billion, including long-term leases) than it has in the past, taking a cue from the utility by looking at overall debt in relation to cash flow. (LIPA has noted that the ratio of its debt compared with its total assets is shrinking, even as debt levels trend slightly upward).
Reminded that Fitch in the past has expressed concerns about LIPA's relatively high debt per customer, Pidherny said that while “the authority’s [debt] levels do remain high by certain standards,” the “ratio of debt to cash flow has steadily improved and that is an important driver of our analysis.”
Fitch likes the fact that LIPA’s flow of cash “has become much steadier and more predictable with consistent modest rate increases and implementation of a number of automatic recovery mechanisms.”
Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.
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