Moody's cites LIPA financial policies, rates in hinting at rating upgrade

LIPA is likely to receive a rating upgrade from Moody’s Investor Services in coming months because of a “dramatically improved credit profile” fortified by a willingness to increase rates and enact revenue recouping mechanisms that other utilities “would beg to have,” a Moody’s official said.

Moody’s vice president Scott Solomon, at a presentation to LIPA trustees last month, cited a 2015 rate hike that allowed the authority to collect some $250 million from customers over three years and other board policies in applauding LIPA’s rise from a low-rated public utility.

“We’ve noticed and acknowledged a significant improvement in LIPA’s financial profile,” Solomon said. “Hopefully by this time next year there will be another one [upgrade].”

Moody’s current rating for LIPA is A3 with a positive outlook. A higher rating would allow it to borrow money at a lower interest rate.

Moody’s applauded the fact that LIPA now keeps more cash and cash equivalents on hand than at any other time in its history: $615 million in reserves at the conclusion of the quarter ending March 31. That’s enough to fund operations for nearly 150 days. Prior to 2014, when new board policies were enacted, LIPA held only enough cash to fund operations for 37 days, Moody’s said.

Solomon cited the board’s hotly debated decision in 2015 to increase rates to collect a cumulative $250 million in new revenue over three years as one of the bigger factors for the improvements that he said point toward a credit-rating increase.

The LIPA Reform Act also allowed LIPA to save hundreds of millions of dollars in interest expense by creating a new authority to shift $4.5 billion in LIPA debt with more restrictive bond covenants at lower rates.

All the moves provided LIPA with the “flexibility to increase rates” from 2016 to 2018 “without significantly negatively impacting customer bills,” the Moody’s official said.

Yet Solomon said the utility’s financial metrics are “somewhat weak for the [higher] rating category” to which LIPA aspires. He pointed to LIPA’s relatively high debt load even though the utility is working aggressively to fund less of its big long-term projects through debt.

Moody’s found LIPA bills are around 20 percent higher than those of other utilities statewide, but on par with those of its size in the region, such as PSE&G of New Jersey, Con Edison and Eversource in Connecticut.

LIPA now boasts several “automatic rate-recovery mechanisms that provide automatic protection against external factors — weather, regional eco activity and storm costs. IOUs would beg to have these decoupling mechanisms that are now afforded to LIPA,” Solomon said.

At the board meeting, trustee Tom McAteer touted the anticipated Moody’s upgrade as a sign that the board had done the right thing in passing the rate hike in 2015.

Long-term debt, according to LIPA’s recently filed 2018 financial report, has swelled to $8.38 billion at year's end 2018, compared with $7.76 billion at the end of 2016. Annual interest expense in 2018 increased to $352.4 million, compared with $349.8 million in 2016, according to the financial statement. Total interest expense is expected to jump to $358.7 million in 2019.

“Nobody likes to approve even small rate increases,” said McAteer, a Cuomo appointee. “But this board understood that the rating agencies look at revenue and willingness to raise revenue as one of the key factors in determining if we’re a good risk.”

Trustee Matthew Cordaro, who voted against the rate hike, said he agreed a balance had to be struck, but said he felt the rate increase, coupled with numerous mechanisms to recoup revenue and the policy toward keeping more cash on hand, starts to swing the balance in favor of Wall Street investors who hold LIPA bonds.

“The question is always, who is more important, Wall Street or the customer?” Cordaro said. “The answer is there’s a delicate balance. How far do you give up your customers to get this better rating? Wall Street always pushes for a rate increase as it determines its ratings.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

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