LIPA rate hike satisfies Wall Street

More than 1,000 customers and lawmakers wrote this summer to say LIPA's rate-hike request was too large; PSEG Long Island once argued it wasn't enough. But one influential entity found the outcome of the recent rate-hike proceeding just right: Wall Street.

Earlier this month, all three major Wall Street credit ratings agencies cited the recent approval of the LIPA/PSEG rate hike in raising their outlooks of the utility. The views were presented as LIPA issued another $266 million in debt, following a $1.1 billion debt offering this summer, the bulk of which will refinance older, higher-interest debt. Wall Street firms charge hefty fees to underwrite debt offerings, the largest of which helped LIPA shave $172 million in near-term interest expenses.

Despite their concerns about LIPA's high debt and a general wariness with increased regulatory scrutiny, the ratings firms generally applauded LIPA's plan to collect more cash from ratepayers to fund future infrastructure projects. None of the firms raised LIPA's rating, but indicated they could in the future if LIPA continued on an improved path. Higher ratings generally translate to lower borrowing costs.

Fitch Ratings increased LIPA's outlook to stable from negative, citing "constructive treatment" by the Department of Public Service, which gave the thumbs-up to a $325.4 million rate hike. (LIPA has since reduced the three-year total to $287.4 million. PSEG had sought $387 million.)

The Fitch review took note of LIPA's total $10.6 billion of debt (including power-plant leases) and the fact that LIPA's debt per customer of $9,539 is well above the median $3,412 for similar utilities. Nevertheless, Fitch said, LIPA's plan to gradually reduce its reliance on debt was laudable and could ultimately "moderate future borrowings."

Standard & Poor's Rating Services also raised its outlook for LIPA to stable from negative, saying the DPS proceeding removed "an element of uncertainty that surrounded what had been an untested oversight mechanism."

Despite the optimism, S&P said it did not believe "dissatisfaction regarding high rates" from ratepayers and elected officials "has materially abated." The move will raise the delivery portion of average residential bills by around 65 cents a month next year, $3.33 a month in 2017 and $3.41 a month in 2018, LIPA said. LIPA finance chief Tom Falcone said the rate plan was a "balance" of moderately increased borrowing, rates and infrastructure spending. Wall Street took notice, he said, because "we're providing predictability and doing fiscally responsible things."

Moody's Investor Service also assigned a stable outlook to LIPA debt, reflecting its expectation of a "continued improvement" in LIPA's credit profile. The outlook cites LIPA's "strengthened liquidity position," and says LIPA's credit rating could go up or down depending on how the utility operates in the next few years. Challenges include "weak liquidity and financial metrics relative to peers," the need for future rate-case filings, and the need to improve the grid "while rates remain under political scrutiny."

Numerous state and local lawmakers opposed the rate hike. Among them was Assemb. Todd Kaminsky (D-Long Beach) who in a letter to regulators in August wrote, "Consumers should not be forced to bear the burden of LIPA's mishandled finances and rising debt, especially in light of an increasingly difficult and expensive economic climate."

More than a thousand ratepayers, too, objected to the increase in letters to the state. Many were seniors, including Evelyn Christensen, a widow from West Islip, who in a June letter wrote, "Sometimes I can't sleep at night worrying about paying bills. It's a crime to continually burden seniors with more and more." LIPA says if natural gas prices continue on a downward trend, bills could decrease.

PSEG last month expressed concern the recommendation "falls short of what's needed to provide our customers with the performance envisioned by the LIPA Reform Act." PSEG officials more recently have said they will not oppose the lower increase.

Pending the LIPA board's approval of the 2016 budget in December, the rate hike will take effect in January.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

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