LIPA’s debt-issuing sister authority last week completed the sale of $636.7 million of bonds secured through rates from LIPA’s 1.1 million customers, the latest in a series of refinancings that the utility says has saved it hundreds of millions of dollars.
Last week’s move will shift debt from old LIPA-revenue-backed bonds with an average 5.4 percent interest rate to newly securitized bonds with a 2.7 percent interest rate, LIPA said. The debt was issued by the Utility Debt Securitization Authority, an entity formed under provisions of the LIPA Reform Act of 2013. UDSA bonds are guaranteed by “non-bypassable” and irrevocable assurances that ratepayers will pay.
It’s the third such transaction since the reform act paved the way for the transactions, which shifts the debt to bonds with better ratings because of guarantees they will be paid by ratepayers, even if LIPA were to file for bankruptcy protection. Traditional LIPA bonds have been hobbled by the authority’s low debt rating, which is among the lowest in the nation, LIPA has said.
The first three and an expected fourth refinancing this year will save a total of $375 million by reducing the interest rates, LIPA said. The first $2 billion in 2014 saved $132 million, the next in 2015 of $1 billion saved another $128 million and this recent transaction saved $115 million, according to LIPA. Another transaction in the fall could save another $57 million when LIPA refinances $467 million more, Some $4.1 billion will be refinanced by year end. The LIPA act allows $4.5 billion of its $7.8 billion in debt to be refinanced.
Because LIPA is replacing old debt with new at lower interest rates, its total debt isn’t increasing as a result of the transactions. But LIPA is continuing to borrow for infrastructure projects and other programs in the future, and it plans another $930 million in revolving credit and bond borrowings later this year.
The authority hit a snag last month when the Public Authority Control Board, a state entity that approves all state debt offerings, tabled LIPA’s request for approval of the $930 million in transactions because of unanswered questions, state officials said. The senior LIPA official said the authority will re-submit its application to the PACB next month, after traveling to Albany this month to respond to the questions.
LIPA’s current $7.8 million in debt has crept up from a low $6.6 billion at the end of 2009, and is expected to climb to $8.2 billion by the end of 2018.
Lina Santoro, an analyst who covers LIPA for Fitch Ratings, said that while LIPA’s high debt levels “still hold them back a bit,” the utility’s plan to reduce future borrowing by paying for infrastructure projects with current collections “should improve their balance sheet over time.”
“They certainly are more highly leveraged” than their peers in the market, Santoro said, but “that should level off for the next few years.”
The savings that LIPA is getting from the refinancings have been used to moderate rates during the three year rate plan, helping to fund a new increased “coverage” program to reduce future borrowings by paying for projects with current collections. “The savings more than offsets the coverage increase and almost completely pays for the new debt to finance the capital plan,” a senior LIPA official said.
LIPA’s debt per customer, at $9,539, is among the highest among utilities nationally, and compares with that of peer utilities of $3,412 per customer.