Three upgrades buoy Long Island Power Authority ahead of deal
The turnaround of Long Island Power Authority under the leadership of former Morgan Stanley banker Tom Falcone entered a new chapter last week with three rating upgrades.
LIPA’s bonds are carry the highest ratings in the public utility’s 33-year history following one-notch upgrades from Moody’s Investors Service, S&P Global Ratings and Fitch Ratings ahead of a planned $485 million sale. The new ratings are A2 from Moody’s and A from both Fitch and S&P. All three assign stable outlooks.
"The upgrade reflects expectations of strong fixed charge coverage metrics that require moderate rate increases,” S&P credit analyst David Bodek said in a statement. “The upgrade also reflects the service territory's extremely strong economic fundamentals that temper the utility's high rates.”
Falcone was not immediately available for comment on the three credit upgrades. The hat trick credit boost now marks four upgrades for Falcone since he arrived at LIPA in 2014 following a 14-year public finance career at Morgan Stanley. Falcone, who was promoted to CEO from CFO in 2016, has spearheaded an aggressive debt refinancing and instituted modest rate increases.
LIPA has refinanced about 60% of $7.6 billion in outstanding debt it previously held by issuing Triple-A-rated bonds through its Utility Debt Securitization Authority. The $4.5 billion of conduit borrowing, which was enabled by the LIPA Reform Act of 2013, generated an estimated $492 million in present value savings.
Total debt obligations have stabilized at LIPA in recent years totaling $10.6 billion at the end of 2018, according to Fitch. The debt profile includes the authority’s electric system revenue bonds, capitalized lease obligations and securitized restructuring bonds issued by the UDSA.
“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,” Fitch analyst Dennis Pidherny wrote Thursday.
“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,” he 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,” Moody's analyst Scott Solomon wrote Friday. “LIPA's rating is well-positioned at the mid- A category and is not expected to move upward in the foreseeable future.”
LIPA’s capital spending is expected to exceed historical levels in 2019 and 2020 at $1.6 billion over the two-year period for smart meters and enhancing poor-performing circuits.
LIPA’s new electric system general revenue bonds will be priced Thursday by lead managers Bank of America Merrill Lynch and Loop Capital will fund part of the Authority’s $869 million capital budget for 2019. Cash from operations and FEMA grants will provide the remainder of capital budget funding, according to Moody’s.
Three years ago LIPA received its first bond upgrade since 2005 when Moody’s upgraded the utility’s senior lien revenue bonds one notch to A3 from Baa1 citing a three-year rate increase plan that took effect on Jan. 1, 2016. Solomon noted that with the three-year rate plan period now expired, LIPA is only required to submit a proposed rate hike for regulatory review if it would increase delivery rates by more than 2.5%.
LIPA was formed in 1986 by then New York Gov. Mario Cuomo and in 1998 became the retail supplier for Nassau and Suffolk Counties as well as the Rockaway Peninsula of Queens by acquiring the Long Island Lighting Company. The utility's operations were taken over by PSEG Long Island in 2014 following the LIPA Reform Act of 2013.