Fitch Bond Rating – Glass Half Full?


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.

July 12, 2011 06:03 PM Eastern Daylight Time

      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.

SECURITY:

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.   

RATING RATIONALE:

–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.

CREDIT SUMMARY:

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.

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About lipaoversight

LIPA Oversight Committee was created to analyze the rates and practices to determine if it is working in the best interests of the Suffolk County ratepayers
This entry was posted in bond rating, lipa, long island power authority, Oversight. Bookmark the permalink.

One Response to Fitch Bond Rating – Glass Half Full?

  1. Rob from LI says:

    Who rates Fitch?

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