September 22, 2008
Fitch Rates LIPA’s (New York) $500MM Electric System Revs ‘A-‘; Outlook Negative
Fitch Ratings has assigned an 'A-' to the Long Island Power Authority's (LIPA) planned issuance of $549.9 million series 2008 A and B fixed rate electric system general revenue and refunding bonds. Proceeds from the 2008 bonds will be used for refunding and general capital purposes. Proceeds of the 2008A bonds will refund certain senior and subordinate bonds and proceeds from the 2008B bonds will be used to fund general capital expenditures. The bonds are scheduled to price via negotiation, on a day-to-day calendar, depending on market conditions. Depending on market conditions, LIPA is considering the potential restructuring of the series 2001 B,C,M and N bonds, which are currently FSA insured auction rate securities ($200 million in aggregate). Fitch has also affirmed LIPA's outstanding $5.5 billion electric system general revenue bonds (senior lien) at 'A-'. The Rating Outlook is Negative.
LIPA also has $979.7 million subordinate lien electric system revenue bonds that do not have underlying Fitch ratings but rather enhanced credit ratings based upon the bank/financial institution providing the liquidity and/or credit support. LIPA has an additional $155.4 million in outstanding bonds for the New York State Energy Research and Development Authority (NYSERDA), which are obligations of KeySpan Corp. (recently acquired by National Grid, Plc) and $2.2 billion in capital lease obligations. LIPA's obligation on the NYSERDA bonds and the capital leases both rank junior in payment to the subordinate lien bonds.
Fitch viewed the LIPA bill as a credit concern as it could affect LIPA's ability to continue to adequately recover total costs on a timely basis in the future. On Sept. 5, 2008, Governor Paterson vetoed the LIPA bill, with strong language in the veto message essentially supportive of maintaining LIPA's financial stability. While LIPA's ability to recover their costs is essentially left unchanged with the veto of this bill, Fitch believes the political pressure for regulatory oversight of LIPA's rates continues to persist. Over the next 6-to-12 months, Fitch will be monitoring whether any alternative legislative bill is developed, as well as LIPA's ability to achieve their projected financial targets, remain current on fuel and purchased power expenses, and manage through this period of moderately slowing kwh sales coupled with high fuel and energy costs.
LIPA's rating affirmation reflects the system's primarily transmission and distribution based business, reasonable power supply strategy, adequate financial performance, favorable customer base, and reliable electric service. A key credit strength, particularly over past few years, has been LIPA's utilization of a fuel and purchased power cost adjustment (FPPCA), which allows pass-through of rising fuel and purchased energy costs on a timely basis. Adequate recovery of fuel and purchased power costs is a key credit issue for LIPA as such costs account for more than half of LIPA's operating expenses in 2007. Management and the Board of Trustees have been committed to increase the FPPCA as necessary to maintain the utility's fiscal health.
Credit concerns include LIPA's high electric rates, concentrated commodity exposure in more volatile fuels (natural gas/oil), and above-average leverage for the rating category. Additionally, energy sales growth is beginning to decline, due to the regional and national economic slowdown, which could put added pressure on rates in the future. While LIPA's retail rates are very high relative to other municipal power systems in the region, their electric rates are still below their nearest corporate counterpart, Consolidated Edison Company of New York.
The Long Island Power Authority, through its wholly owned subsidiary, LIPA, owns and operates an electric distribution system providing electric service to most of Nassau and Suffolk counties and the Far Rockaway section of Queens. LIPA serves over 1.1 million customers and had operating revenues of approximately $3.5 billion for fiscal year-end Dec. 31, 2007.