Moody’s Investors Service cut its ratings on Long Island Power Authority citing the impact of Hurricane Sandy.
The rating on LIPA’sfirst lien revenue bonds was lowered to Baa1 from A3, Moody’s said Wednesday afternoon.
The downgrade affects $7 billion.
Moody’s also downgraded LIPA’s second lien revenue bonds to Baa2 from Baa1 and its third lien New York State Energy Research and Development Authority notes to Baa3 from Baa2. The ratings outlook on LIPA remains negative.
The downgrade is connected with LIPA’s persistently weak credit metrics and the negative impact of Superstorm Sandy on LIPA, wrote vice president Laura Schumacher and managing director Chee Mee Hu.
As of Dec. 31 LIPA had “only about 37 days of liquidity” or 48 days, including available commercial paper, the analysts wrote. These levels are at the low end of Baa for these type of utilities, they wrote. At the end of March cash was at a similar level.
The authority’s liquidity position is still highly dependent on Federal Emergency Management Agency cost reimbursement, the analysts wrote. The amount and timing of this reimbursement is unclear.
Recently, FEMA is reported to have allocated $267 million for Sandy reimbursement. None of this has been disbursed. LIPA expects to receive $100 million of this in the week of May 20 and the rest in the following 45 days.
The intense scrutiny of LIPA that followed Sandy will make it more difficult for LIPA to enact rate increases or other possibly necessary steps to achieve financial stability, the analysts wrote.
On the plus side, LIPA’s cash strain has eased since it recently gained a $500 million credit facility, they wrote.
PSEG has a generally positive reputation, Schumacher told The Bond Buyer. If the New Jersey utility were to take over most of LIPA’s operations, as New York Gov. Andrew Cuomo proposed Monday, it would be a generally positive step, she said.
However, Cuomo’s proposal would make it more difficult for LIPA to make rate changes. “It would be onerous,” though it is unclear if the Cuomo’s draft proposal will be passed, she said.
The proposal’s provisions making it more difficult for LIPA to change rates is one reason for the rating’s negative outlook, Schumacher said.
Cuomo is also proposing a three year rate freeze. “We view rate freezes as negative for credit quality,” the analysts wrote.
“We are disappointed by Moody’s actions considering the aggressive steps LIPA and our board of trustees have taken to raise liquidity and maintain financial strength,” said LIPA chief financial officer Michael Taunton. “We continue to work with federal and state government towards full and timely FEMA reimbursement for Superstorm Sandy as well as additional monies for future storm hardening projects in order to continue the strengthening of our infrastructure. We take our credit rating very seriously and will continue to take actions that protect our bondholders and customers.”
Richard Kaufmann, the New York chairman of energy and finance, said the governor proposed some steps that the report indicated would improve the rating. . These include “ making sure FEMA funds are paid out on time, a timely transition for PSEG to take over operations and establishing a reformed LIPA board structure to keep [its] tax exempt status to maintain bond covenants,” Kauffman said.
