NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-'rating on $4.9 billion of outstanding Long Island Power Authority (LIPA) electric system general revenue bonds.
The Rating Outlook remains Negative.
The electric system general revenue bonds are senior lien obligations of LIPA secured by the net revenues of the electric system, prior to the subordinate lien debt (not rated by Fitch).
KEY RATING DRIVERS
TRANSFORMATIVE LEGISLATION ENACTED: The LIPA Reform Act enacted in 2013 broadens the operating responsibilities of the new system-operator (PSEG Long Island) and expands the regulatory oversight of LIPA. The continued Negative Outlook reflects rate pressures that are likely to remain over the near-term, and uncertainty regarding future financial goals and policies, which are currently under review.
STORM COST RECOVERY PROGRESSING: The recovery of Hurricane Sandy damage costs is progressing as expected and outlays have not materially compromised LIPA's liquidity. LIPA estimates total storm costs at $702 million, of which, FEMA is reimbursing LIPA at 90% (excluding $62 million reimbursement by insurance). Available liquidity sources remain adequate at 638.2 million, as of June 30, 2014.
STRONG UTILITY FUNDAMENTALS: LIPA's rating reflects strong utility fundamentals including an improved power supply mix, an affluent well-diversified customer base, and approved rate mechanisms to stabilize cash flow. These strengths remain unaffected by the recent legislation and restructuring initiatives.
WEAK DEBT METRICS: The authority remains considerably levered and days operating cash is below peer medians. Total debt-to-funds-available-for debt service stands at 11x for fiscal 2013, compared to 8.6x for the rating category median. Excluding the non-recourse securitization bonds, debt to FADS falls to 8.8x. Debt per customer is also elevated at $8,837 versus the 'A-'rating median of $3,403.
ADOPTION OF ROBUST FINANCIAL POLICIES: The adoption of rate-setting and financial policies that are supportive of credit quality consistent with the rating would be viewed positively and could stabilize the Outlook.
RESTRICTIVE REGULATORY AND/OR POLITICAL OVERSIGHT: Evidence of the proposed changes to LIPA's business model and/or expanded regulatory oversight limiting the adequacy and timeliness of necessary rate increases would result in a downgrade.
LIPA is one of the largest municipal electric distribution systems in the U.S., serving a population base of more than 3 million people located throughout Nassau and Suffolk counties and the Rockaways section of Queens in New York City. The service area continues to exhibit above average wealth and income levels. LIPA's customer base is well diversified and desirable as residential users account for 54% of revenues.
Operations and management services related to the LIPA transmission and distribution system, which had been provided by a subsidiary of National Grid plc, has shifted to PSEG-LI, a subsidiary of Public Service Enterprise Group (issuer default rating 'BBB+'; Stable). Following a request for proposals, Public Service Enterprise Group (PSEG) was selected as the new system service provider for 12 years, as of Jan. 1, 2014.
RESTRUCTURING LEGISLATION ENACTED
Following Hurricane Sandy and its aftermath, LIPA faced staunch criticism from customers, local politicians and the governor's office regarding the utility's response, and timeliness in restoring power. The intense criticism opened the way for the passage of restructuring legislation, the LIPA Reform Act in July 2013. The Reform Act was intended to (i) restructure the relationship between LIPA and the system service provider, such that PSEGLI would assume broader control of all utility operations, (ii) establish a new office of the Department of Public Service (DPS) with responsibility to oversee and make recommendations regarding LIPA's rates and operations, (iii) and authorize the sale of securitized bonds that would be used to refinance a portion of LIPA's outstanding debt and lower debt service costs.
Fitch views a number of the restructuring initiatives positively; particularly those designed to moderate LIPA's operating costs. These include the elimination of the applicable state franchise tax and a 2% limit on increases in payments in lieu of taxes (PILOTs).
The broader oversight role of the DPS, however, is a concern. Although the role is intended to be advisory, the nature of the department's advice, and how obligated the LIPA board will feel to implement DPS recommendations, is uncertain at this time.
The DPS will be required to review LIPA's rates for 2016-2018, and to review revenue increases that exceed 2.5% after 2018. Concerns about the timeliness of the review process are somewhat mitigated by LIPA's authority to increase revenues prior to the DPS recommendation.
REIMBURSEMENT OF STORM COSTS PROGRESSING
The recovery of storm related costs have progressed reasonably well to date. LIPA's latest estimate of storm-related costs is $702 million (excluding costs covered under insurance), down from initial estimates of $806 million. The Authority has already received reimbursements of $444 million from FEMA, which have been timely. LIPA expects remaining FEMA reimbursements to be completed by year end.
LIPA's available liquid resources remain sufficient. The authority arranged a new $500 million three-year working capital line of credit from a syndicate of banks in 2013 to bolster liquidity. As of June 30, 2014, LIPA's days operating liquidity was solid at 77 days, and included unencumbered cash ($458.1 million) and available bank lines ($180 million).
LEVERAGE REMAINS HIGH
Total debt at year end 2013 was $10.2 billion, including the securitization debt, which is up from the prior year end ($9.8 billion). Without the securitization debt, total debt falls to $8.2 billion. Year end 2013 ratios for debt per customer ($8,837) and debt to capitalization (96.4%) were well above the medians for 'A-' rated retail systems ($3,403 and 51.0%, respectively). LIPA's annual debt service will fall by about $16 million (due to securitization), providing some cushion for the Authority to keep base rates flat through 2015 as projected.
LIPA's post-restructuring rate-setting policy and the effect of projected costs savings on financial margins remain unclear.
Fitch expects greater clarity on these issues in 2015, as the Authority submits its 3 year rate proposal to the DPS for its review at that time.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Public Power Rating Criteria this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum -- June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (Mar. 18, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum -- June 2014