Moody’s Investor Service on Friday upgraded LIPA’s credit rating one notch, citing “enhancements” to its ability to recover costs from customers following last year’s rate-hike proceeding.
The upgrade, which applies to LIPA’s senior lien revenue bonds (upgraded to A3 from Baa1) and subordinated lien revenue bonds (to Baa1 from Baa2), took note of improvements in LIPA’s operating performance and PSEG Long Island customer satisfaction levels, among other factors. Higher credit ratings generally mean lower borrowing costs.
Moody’s took particular note of a series of new measures implemented by LIPA over the past year to recoup costs if revenues fall below projections, and a new strategy to increase its so-called “coverage ratios” that increases the authority’s cash on hand to reduce future borrowings.
Already this year, one such cost-recovery mechanism resulted in an average customer bill increase of $1.69. Next month, it will increase to $4.30 a month. That is atop power supply charges that have jumped 58 percent since January, and a delivery rate that is up 1 percent this year and will increase more than 3 percent in each of the next two years.
Power supply charges this year are generally lower than in the past two years, with generally lower natural gas costs.
The new mechanisms “result in a more stable and predictable cash flow and a more resilient liquidity profile,” Moody’s wrote.
Moody’s took note of LIPA’s revenue decoupling mechanism, which allows it to recoup costs when revenues decline due to green-energy programs or unexpected weather, and a delivery service adjustment, which lets it recoup costs from unexpected turns in union negotiations, power contracts or debt offerings. Both mechanisms require that LIPA return funds to customers should revenue come in above projections.
“Collectively, these mechanisms provide automatic cost recovery should certain external events occur, including revenue variations that result from changes in economic conditions, weather or energy efficiency programs as well as higher-than-budgeted storm costs,” Moody’s said.
The rating agency also cited improvements in LIPA’s operating performance, improved customer satisfaction levels, “supportive” relationships with state regulators and an expectation for better financial performance “on a sustained basis.”
LIPA also has implemented a program to use more of its cash to fund infrastructure projects, a plan it says will ultimately result in lower borrowing levels in the future. LIPA’s debt remains high, at some $7.7 billion, or more than $9,500 per customer. And borrowing is expected to increase to $8.2 billion by 2018.
LIPA also has been refinancing much of its old debt by issuing new bonds at lower interest rates. Savings from those refinancings in the hundreds of millions of dollars have helped offset what might have been greater rate increases, while helping fund financial plans.