LIPA issues $2.1 billion in new debt

LIPA last week completed a $2.14 billion debt offering, refinancing $1.78 billion of old bonds at lower rates while adding around $350 million in new borrowing atop its existing $6.8 billion debt.

Most of the $350 million in new borrowing will be used to pay off a recent LIPA settlement with National Grid for about $263.5 million in pension and other retirement benefits for former utility workers, LIPA spokesman Mark Gross said. The Long Island Power Authority announced the settlement last month.

Banks that handled the debt offering for LIPA's newly formed Utility Debt Securitization Authority, created as part of Gov. Andrew M. Cuomo's LIPA reform act, made around $10 million in underwriting fees on the transaction, according to LIPA. Goldman Sachs and Morgan Stanley were the lead banks on the offering. Total expenses for the offering, including legal and banking fees, were $25 million, LIPA said.

Beginning in January, ratepayers will see a new charge on their bills to cover costs of the debt offering and repayment. For customers who use 775 kilowatt hours of electricity in a month, the charge will be around $9.68. But beginning in March, bills will also include an offsetting amount in the delivery charge -- roughly $11 on average residential bills -- that will include about $1 from savings LIPA expects to show as a result of refinancing.

Around $483 million of the new debt is taxable, while $1.539 billion is tax-exempt, using LIPA's status as a public authority to avoid taxes, Gross said.

As Newsday reported last month, LIPA's debt by the end of 2014 is expected to jump to $7.76 billion, including around $200 million in short-term borrowing, up from this year's expected $6.83 billion. LIPA has said its focus since the law passed has changed from "a reduction in total debt to a reduction in debt service costs."

But even as LIPA saves some money on a portion of the newly refinanced debt, total interest rate expenses will increase next year by $21 million, or 6.3 percent, because LIPA's total borrowing has increased, LIPA said in its recently approved annual budget.

LIPA chief financial officer Michael Taunton, who is leaving the utility at month's end, said in a statement the new debt offering "allows us to strengthen our financial health, reduce debt service costs, and reinvest the savings achieved back into the business . . ."

LIPA received a AAA rating on its new debt, but that's no surprise given the generous terms of the bonds. According to the LIPA reform act, passed in June, the new debt will obligate LIPA customers to pay off the bonds with virtually no wiggle room to avoid payment. The new debt authority can't declare bankruptcy, for instance.

The act also limits the time to challenge changes to the annual cost of the new debt to 30 days after changes are announced.Even then, ratepayers can "make comments," on the changes, but can only challenge the "mathematical accuracy" of the calculations on which the adjustment is based, not the types of charges included, according to the law.