NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an implied electric system general revenue subordinate lien obligation for the Long Island Power Authority (LIPA) at 'A-'. The rating is implied as there are no LIPA subordinate lien bonds currently outstanding.
Fitch has also assigned an 'A-' bank note rating to the following subordinate lien commercial paper (CP) notes:
--$200.0 million series 2014 CP-1A (federally taxable) and 1B;
--$100.0 million series 2014 CP-2A (federally taxable) and 2B;
The bank note rating is assigned to LIPA's commercial paper notes but will only become applicable if the notes cannot be remarketed and are purchased by the bank providing the corresponding letters of credit.
The Rating Outlook is Stable.
LIPA's subordinate lien general revenue obligation is secured by the net revenues of the electric system, after payment of operating and maintenance expenses and payments on LIPA's $3.7 billion outstanding senior lien electric revenue bonds and floating rate notes.
KEY RATING DRIVERS
SOLID UTILITY FUNDAMENTALS: LIPA is one of the nation's largest municipal electric distribution systems, serving 1.1 million retail customers. The authority benefits from sound utility fundamentals, including a flexible power supply mix, an affluent and well-diversified customer base and cost recovery mechanisms that stabilize cash flow. A series of comprehensive operating agreements with capable external service providers further support operations.
BUSINESS MODEL TRANSITION: The 2013 LIPA Reform Act, enacted in response to operating challenges following Superstorm Sandy, broadened the responsibilities of the utility's system
operator (PSEGLI) and expanded the state's (Department of Public Service [DPS]) regulatory oversight of LIPA. Fitch Ratings views many of the legislated provisions as supportive of credit quality. However, added regulatory oversight could affect LIPA's financial and rate flexibility over time.
CONSTRUCTIVE REGULATORY RECOMMENDATIONS: The constructive recommendations submitted by the DPS following its initial review of LIPA's three-year rate plan support LIPA's Stable
Outlook. Although the revised rate plan reduced LIPA's proposed revenue increase, the DPS recommendations provide sound long-term financial goals and policies.
RATE PRESSURES PERSIST: Despite electric rates that have become more competitive regionally, political and consumer rate pressures persist as LIPA's average residential revenue per kilowatt hour (kwh) remains among the highest in the nation at approximately 19.4 cents/kwh.
HIGH DEBT LEVELS: As of Sept. 30, 2015, LIPA's debt levels, including capital lease and securitization obligations, remain high, totaling $10.2 billion, or $9,539 per retail customer, well above the peer utility median of $3,412. Although Fitch recognizes the benefits of the separately secured $2.9 billion in securitized debt, the repayment profile remains an obligation and burden of current ratepayers. Positively, LIPA's three-year rate plan aims to reduce debt financing of future capex to less than 64%, which should moderate future borrowings.
SOUND LIQUIDITY: LIPA's liquidity was solid at 97 days of operating cash, and 170 days including available short-term notes and external bank facility at Dec. 31, 2015. Weaker metrics reported in recent years were affected by significant storm costs, particularly those related to Superstorm Sandy, which totaled $704 million. Favorably, federal reimbursement of roughly 90% of the costs incurred is now complete.
IMPROVED OPERATING STABILITY: Evidence of improved operating stability and financial performance at the Long Island Power Authority sufficient to offset persistent political and consumer-driven rate pressures could result in consideration of a positive rating.
LIPA currently has no subordinate lien revenue bonds outstanding. However, the outstanding series 2014 CP notes (maximum authorized issuance of $300 million) rank on parity, in terms of payment, with LIPA's subordinate lien obligation. LIPA does not plan to issue subordinate revenue bonds through its forecast period (2016 - 2018). As of Dec. 31, 2015, total subordinate debt outstanding, which includes just the series 2014 CP, accounted for a modest 2.9% of total debt and fixed obligations. Given the modest outstanding subordinate lien obligations and the continued use of the senior lien as LIPA's operating lien for financings, Fitch has rated the implied subordinate lien obligation 'A-', which is in-line with LIPA's senior lien debt rating.
The 'A-' bank note rating is assigned to the series 2014 CP notes, but would only become applicable if the bonds cannot be remarketed and are purchased by the bank providing the credit facility. The rating is based on the underlying long-term rating of the electric system.
The rating on the 2014 CP notes are based on the support provided by irrevocable direct-pay letters of credit issued by the Royal Bank of Canada ($200 million CP series 1A-1B; rated 'F1+') and State Street Bank & Trust Company ($100 million CP 2A-2B; rated 'F1+'). The letters of credit are scheduled to expire in Dec. 2017.
For additional information on LIPA's long term ratings see the recent full rating report dated Feb. 18, 2016. For additional information on LIPA's subordinate lien CP ratings, see the last press release dated Nov. 20, 2014. Both the report and press release are available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form