Concerns Voiced about LIPA's Expanding Debt Load

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Despite a significant restructuring of operations and finances in the wake of its poor performance after Hurricane Sandy, the Long Island Power Authority's debt load is rising.

Analysts have said that LIPA's high debt levels have forced it to charge among the highest electrical rates in the nation. Ratings agencies have cited the high debt in giving LIPA less-than-stellar ratings.

LIPA board of trustees member Matthew Cordaro, emphasizing that his statements to The Bond Buyer were made as an individual and not meant to represent the board's views, noted LIPA's high electric rates.

"Increasing debt is not going to help them stabilize rates over time," he said. "Any increase in debt for LIPA is a concern for me."

LIPA's general revenue bonds are rated A-minus by Fitch Ratings and Standard & Poor's and Baa1 by Moody's Investors Service. Fitch and Moody's have negative outlooks on their ratings while S&P has a neutral outlook.

End of calendar year debt is expected to go to $7.8 billion at the end of 2014 from $7.2 billion at the end of 2013, Cordaro said. A LIPA official said the authority's debt at the end of 2013 was $7.4 billion. All figures include the debt from the LIPA and the Utility Debt Securitization Authority, whose debt is also supported by the same Long Island electrical consumers.

The securitization authority was created as part of LIPA's post-Sandy revamp. Criticism of the utility's laggard restoration of power after the storm led New York to pass the 2013 LIPA Reform Act, which gave private operator PSEG-Long Island broad control over the public utility's operations.

It also authorized the securitization debt, which replaced LIPA revenue bonds with $2.02 billion of debt that securitized a surcharge on ratepayers' bills. The securitization debt received triple-A ratings, lowering overall financing costs.

LIPA is currently scheduled to pay at or slightly more than $500 million in debt service each year during most years through 2033. Any additional borrowing would push this up.

"The previous board of LIPA was quite concerned about the high debt level because it, along with unconscionably high property taxes, drove LIPA's rates to be among the highest in the country," said Howard Steinberg, who served for 16 years on the LIPA board until 2012.

"In fact, we had mandated to LIPA staff that they devise a plan to reduce debt by $1.5 to $2 billion over several years, a plan that was beginning to take hold when Superstorm Sandy intervened and led to the creation of a new board structure at LIPA with different priorities," he said.

"I continue to believe that debt reduction is the right goal for the sake of the ratepayers and the economic competitiveness and prosperity of Long Island," Steinberg said.

Dennis Pidherny, Fitch Ratings' sector head in the U.S. public power group, said his group does not view the debt growth positively. "We are hopeful that the authority will get to the point where it could reduce its debt burden," he said.

On Sept. 4 Fitch noted "weak debt metrics" as a key rating driver for the authority. Total debt-to-funds-available-for-debt service stood at 11 times in fiscal 2013, compared to the rating category median of 8.6 times. Debt per customer was also elevated at $8,837 versus the A-minus rating median of $3,403.

Rather than focusing on the recent increase in debt, Pidherny said his group is more focused on what the authority does with the borrowed money.

In May 2013 Moody's reported LIPA's three year debt ratio at 137%, which it characterized as a Ba level. The debt ratio is equal to total debt divided by the combined value of fixed assets and working capital.

In August the board approved a plan to increase and exchange LIPA debt by a 5-to-1 vote, with Cordaro abstaining. Two board members were absent from the meeting.

The vote board authorized the refinancing of $700 million of debt, nearly all of it short-term, with long-term fixed rate bonds. It also authorized the sale of up to $675 million in new money fixed rate long-term bonds for "capital expenditures, technology investments, and required pension funding," said LIPA chief financial officer Tom Falcone.

The refinancing of the short-term debt with the long-term debt will open the way for LIPA to issue more short-term debt for capital needs, Public Financial Management managing director

Mike Mace told the board in August. PFM is LIPA's financial advisor.

With the authorization to sell up to $1.375 billion in long-term bonds, "the total amount of debt outstanding at year end is projected to be consistent with the 2014 budget adopted by the board in December 2013," Falcone said. LIPA expects to sell the bonds this year. "The capital projects financed by the debt offering were part of the board's approved capital budget."

An LIPA official noted that while debt has remained fairly constant since the end of 1999, the asset value of its electrical system has gone up by over $4.5 billion.

Moody's senior credit officer Laura Schumacher said LIPA's debt ratio has generally been declining in recent years.

At the August meeting the board also approved expanding its note, commercial paper, and bank-supported variable-rate debt authorization to $1 billion from $885 million. A large portion of these facilities are expiring in 2014 and 2015 and the board has already received proposals to replace them.

The $675 million of new money bonds trustees authorized in August will not all be used for traditional capital expenses. Some will be used for technology and pension funding.

LIPA has been selling debt to pay operating expenses for a while, Cordaro said. Debt should be exclusively used to finance capital expenses, he said.

PSEG Long Island presented a report to LIPA this summer, reported in Newsday, indicating it believed LIPA had been excessively cautious in the previous 10 years in ensuring adequate electrical capacity.

The report recommended that LIPA delay commitments to any requests for proposals not currently under contract or responding to immediate needs. It estimated that the rate impact of LIPA's paying for excessive capacity has been 2.2%.

"The PSEG-LI recommendations to defer some previously planned capital projects until completion of an integrated resource plan could potentially relieve some of the upward pressure on rates that we would expect to see over the planning period - which would be positive," Moody's Schumacher said.

"However, it is early in the process and budgets, capital plans, and associated funding strategies remain in process," she said.

"Ensuring the availability and reliability of generation resources for our customers has been our number one goal," said Rich Shanksy, managing director of LIPA's Power Supply Long Island, "and LIPA's investments helped attain efficiency and environmental gains providing for cleaner production of energy and offset costs through reductions in fuel use. LIPA's planning standards resulted in a high standard of reliability of power supply over the past years to ensure that we have not been short of capacity and energy for our customers even during abnormally hot summers and increasingly stringent New York Independent System Operator planning standards. LIPA welcomes PSEG LI's new perspective."

There has been a history of power outages in Long Island. However, they have not been due to demands exceeding the system's capacity but due to storms knocking out parts of the power delivery grid. After Sandy hit on Oct. 29, 2012, at least 90% of LIPA's customers lost power. It took LIPA about two weeks to fully restore power to its customers.

Fitch's Pidherny said that LIPA could have received more bang for the buck by financing measures to protect the system from storms rather than, as it did, spending to prepare for large energy demands. On a positive note, the New York state government is going to provide LIPA $730 million in grants for storm hardening, Pidherny said.

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