Are Fitch and Moody looking at the same Company? Fitch does not cite to the same degree the negative financial factors affecting LIPA that Moody has. It may be a question of the glass being half full or half empty. But if you want to sign on to Fitch’s optimistic outlook for LIPA and the prospect of retiring significant amounts of debt, then I have a bridge I want to sell you. LIPA’s history to date does not support the notion that things are bound to improve. And for that matter all of the financial ratings take no account of regulatory oversight being a good thing to ensure that LIPA does not repeat its past mistakes and operates in a financially sound manner. Isn’t that something to factor into risks and bolster ratings. It does for many other public utilities in the nation that function under some kind of regulatory oversight.
Fitch Rates Long Island Power Auth, NY’s $250MM Ser 2011A Elec Gen Sys Revs ‘A’; Outlook Stable
NEW YORK–(BUSINESS WIRE)–Fitch Ratings assigns an ‘A’ rating to the following Long Island Power Authority (LIPA) senior lien, electric system general revenue bonds:
–$250 million series 2011A senior lien electric system general revenue bonds.
The bonds, with an expected final maturity of 2038, are scheduled to price during July 2011. Bond proceeds will be used to fund capital expenditures for the transmission and distribution system.
In addition, Fitch affirms the following ratings:
–$5.8 billion parity senior lien electric system general revenue bonds at year end 2010.
The Rating Outlook is Stable.
The series 2011A bonds are senior lien obligations of LIPA secured by the net revenues of the electric system, prior to the subordinate lien debt. The subordinate and senior lien indentures do not include cross default provisions – maintaining a distinct legal separation between the liens in the event of default. Fitch does not rate LIPA’s $725 million of subordinate lien electric system revenue bonds.
–Since its inception in 1998, LIPA has evolved into a mature, stable, transmission and distribution (T&D) system. The timely use of the fuel and purchased power cost adjustment mechanism, along with fuel and purchase power hedging practices, has helped diminish cash flow volatility related to substantial fuel commodity exposure.
–While financial performance has stabilized considerably since 2005, metrics tightened relative to the Fitch ‘A’ rating category medians for fiscal (FY) 2010. The current rating reflects Fitch’s expectation that LIPA’s financial performance measures will improve over the five-year horizon given a recent base rate increase (1.9% effective March 1, 2011) and an anticipated gradual decline in net debt outstanding.
–A key credit strength remains LIPA’s customer base and service territory. LIPA provides electric service to two affluent and economically sound counties (Nassau County and Suffolk County, both rated ‘AA-‘ by Fitch). The service area maintains strong wealth and employment indices that are above the state and national levels.
–LIPA’s customer base is also well diversified and heavily weighted toward stable residential customers (52% of system revenues in FY2010). The utility’s largest user accounts for less than 2% of revenues.
–An ongoing credit concern is LIPA’s high debt burden coupled with relatively high retail electric rates. Debt to funds available for debt service (FADS) is over 15 times (x) for FY2010, compared to the Fitch rating category median of 8.8x. Favorably, debt retirements should begin to outpace new debt issuance beyond 2011.
–While LIPA’s rates are among the highest in the country, their average retail rates are about 20% below its neighboring corporate counterpart (Consolidated Edison Company of NY). Additionally, LIPA’s rates have declined over the past two years due to decreased fuel expenses.
–LIPA operates in a fairly challenging political environment and has been the subject of annually proposed legislation to provide the New York Public Service Commission (PSC) regulatory authority over the ratemaking of LIPA’s municipal electric system. The legislative bill, which has thus far failed to be enacted, was recently passed by the Assembly and Senate once again. A definitive schedule for gubernatorial review has not been set, but Fitch will continue to monitor related developments.
–From a power supply perspective, taking into account energy efficiency goals, LIPA should have adequate power supply resources through 2020. However, its power supply, T&D management, and fuel procurement contracts with KeySpan Corp. (a subsidiary of National Grid plc, with a Fitch IDR rating of ‘A-‘) will expire Dec. 31, 2013. LIPA has begun the process to reevaluate the contracts and possibility for renewal and/or replacement.
–LIPA continues to maintain sound capital market access and significantly reduced its exposure to variable rate debt since 2007. LIPA’s gross variable-rate exposure as a percent of total debt has declined from 21% in FY2007 to 11% in FY2010.
KEY RATING DRIVERS:
–LIPA’s ability to maintain adequate and timely cost recovery in rates, despite sometimes intense local political opposition, will be a key rating driver going forward;
–Approved legislation that would provide the PSC with regulatory oversight over LIPA’s retail rates and limit the authority’s financial flexibility would be viewed unfavorably and could put downward pressure on the rating and/or Outlook;
–The final terms related to LIPA’s long-term power supply and the management of its T&D system after the 2013 expiration of the National Grid contracts will also factor into the authority’s rating.
–The current Stable Outlook reflects Fitch’s expectation that the authority will continue to manage the replacement/refinancing risk associated with $1.1 billion in variable-rate securities, with expiring liquidity/credit facilities over the next four years.
LIPA is one of the largest municipal electric distribution systems in the country, with more than 1.1 million customers and over $3.6 billion in annual revenues. LIPA’s customer base is favorably well-diversified with residential users representing 52% of operating revenues and no single user accounting for more than 2% of operating revenues.
LIPA owns and operates an electric T&D system, which provides service on Long Island (Nassau and Suffolk counties) and the Far Rockaway section of Queens, NY. LIPA also owns an 18% share in the Nine Mile Point 2 nuclear generating facility in upstate New York.
Over the last five years, LIPA has demonstrated its growth and maturation as a business, implementing strategies including current recovery of fuel/purchased power costs, evolving fuel/purchase power hedging strategies, cost cutting initiatives, energy efficiency programs, and has focused on customer and legislative outreach efforts to increase transparency of its operations and financial position. LIPA’s financial performance has improved and stabilized since FY2004, with more consistent financial metrics, such as coverage of senior lien debt service in the 1.7x-2.0x range, and all-in total debt service coverage of 1.10x-1.24x since 2007.
In FY2010, LIPA’s financial metrics weakened slightly relative to the Fitch ‘A’ rating category medians, as LIPA was faced with the effects of the ongoing recession (slowed kilowatt hour [kwh] sales growth) and excessive storm costs (totaling $215 million in FY2010 compared with the previous high of $50.6 million in FY2009). However, financial metrics should improve into FY2011 and beyond as LIPA’s recent base rate increase (1.9%) improves cash flow and debt service finally begins to decline.
While LIPA’s relatively high retail rates are an ongoing concern, LIPA continues to maintain a solid rate advantage in comparison to their nearest competitor, Consolidated Edison Company of New York.
Prospectively, based on conservative sales growth (less than 1% per annum), modest rate increases (mainly fuel and purchased power related), manageable capital improvements and a gradual decline in total debt outstanding, LIPA should maintain adequate financial metrics for the ‘A’ rating category through the forecast period (to 2015).
A key credit factor supporting the current rating level is LIPA’s management and its governing board’s ability to continue to adequately adjust the fuel and purchase power surcharge as needed. Additionally, if legislation regarding PSC regulatory oversight of LIPA’s rates were enacted, it would represent an event risk that would likely trigger a negative rating action by Fitch.