by Paul Ciampoli
APPA News Director
Posted September 9, 2019
Moody’s Investors Service, S&P Global Ratings and Fitch Ratings recently upgraded credit ratings for Long Island Power Authority.
Moody's on Sept. 6 upgraded the senior lien revenue bonds of LIPA to A2 from A3 and concurrently assigned an A2 rating to LIPA's planned issuance of up to $540 million in Electric System General Revenue Bonds, Series 2019A and Series 2019B (Mandatory Tender Bonds).
The debt issuance will fund a portion of the utility's capital expenditure program with the remainder funded from cash from operations and FEMA grants. The rating outlook for LIPA has been revised to stable from positive.
Moody’s said the upgrade and rating assignment reflects the economic strength of LIPA's service territory along with the continued improvement in LIPA's financial performance. “Moreover, it considers our expectation for execution on the company's strategic goal focused on continual improvement on the company's financial position and operating performance.”
LIPA's key financial metrics in 2018 continue to improve, Moody’s noted. Specifically, the company's fixed charge coverage, as calculated by Moody's, improved to 1.27x in 2018 from 1.16x in 2017 and 1.11x in 2016, while its debt ratio declined to less than 100% from 110% during the same timeframe. “Going forward, we expect LIPA to maintain a fixed charge coverage in excess of 1.2x and its debt ratio to continue to trend downward.”
Moody’s said the rating action considers improved levels of operating performance and customer satisfaction for LIPA. “Increased communications with customers and a capital program focused on hardening some of the systems' most vulnerable circuits and substations are drivers for these improvements.”
LIPA's capital spending in 2019 and 2020 are expected to exceed historical levels and approximate $1.6 billion over this timeframe. Components of the capital program include increased roll-out of smart meters and higher spending to improve poor performing circuits.
Moody’s noted that LIPA intends on funding approximately 65% of its capital expenditures with new debt, resulting in approximately $1 billion of incremental general revenue debt over this period. LIPA's debt ratio over this timeframe is expected to decline, however, driven by the sizeable increase in plant property and equipment combined with operating cash flow, scheduled amortization, and the use of remaining FEMA grant funds as a funding source. Capital expenditures are expected to normalize in 2021.
While LIPA's fixed charge coverage ratio “is somewhat weak for a mid-A rated public power utility, its cash flow stream is more stable than certain comparable utilities due to the strong suite of cost recovery mechanisms,” Moody’s said. For example, these mechanisms provide recovery should a shortfall from budgeted revenue and expense items occur due to external factors, including weather, storms and economic conditions. “Moreover, its rate setting capacity is premised around an ability to meet a target debt service coverage ratio, which we view as a credit supportive feature.”
LIPA is operating beyond the term of a three-year rate plan that expired at the end of 2018. At this point, LIPA is only required to submit a proposed rate increase for regulatory review if it would increase delivery rates by more than 2.5%, Moody’s noted. A new rate case may be filed in the 2021/2022 timeframe, it said.
Fitch Ratings on Sept. 5 said it assigned an 'A' rating to the following Long Island Power Authority (LIPA or the authority) bonds: Approximately $235 million electric system general revenue bonds series 2019A and approximately $250 million electric system general revenue bonds series 2019B (Mandatory Tender Bonds).
In addition, Fitch has upgraded $3.4 billion senior lien electric system revenue and refunding bonds (Issuer Default Rating) to 'A' from 'A-'.
The rating outlook on all ratings is Stable.
Fitch said the rating upgrade reflects LIPA's improving leverage ratio and Fitch's expectation that the deleveraging trend that began in 2015 will result in a sustained ratio of below 9.0x. “The reduction in leverage is largely attributable to more robust operating cash flow, driven by series of rate increases and improved cost recovery, as well as debt balances that remain nearly unchanged.”
The rating agency said LIPA's “very strong service area and its more disciplined approach to rate setting should sustain the authority's very strong revenue defensibility and overall performance even through a period of moderate stress, further supporting its financial profile and the final rating.”
S&P Global Ratings on Sept. 5 said it raised its rating on LIPA’s $4.07 billion unsecured revenue bonds to 'A' from 'A-'.
At the same time, S&P Global Ratings assigned its 'A' rating to the authority's proposed $234.5 million series 2019A revenue bonds and its $250 million series 2019B revenue bonds.
The 2019B bonds will be sold in a term mode. Although the 2019B bonds are subject to mandatory tender at the end of each term mode, at the option of management, or on any mode change date,” we conclude the mandatory tender provisions will not impair liquidity because LIPA's obligation to purchase tendered bonds is contingent on its securing remarketing proceeds sufficient to fund the purchase of all tendered bonds.“
The outlook is stable.
Bond proceeds will fund portions of LIPA's capital program.
“The stable outlook reflects expectations of strengthening fixed charge coverage, the availability of robust pass-through mechanisms for recovering rising costs, and favorable service area demographics that can support the utility's high rates,” S&P said.