Fitch Rates Long Island Power Authority's (New York) $500MM Electric System
NEW YORK -- June 22, 2012
Fitch Ratings assigns an 'A' rating to the following senior lien electric
system general revenue bonds for the Long Island Power Authority (LIPA):
--$250 million series 2012A;
--$250 million series 2012B.
The 2012 bonds are scheduled to price via negotiation June 26, 2012. The bonds
are fixed-rate securities, with an anticipated final maturity of Sept. 1, 2042
(2012A bonds) and Sept. 1, 2029 (2012B). The 2012A proceeds will fund capital
expenditures through fiscal 2012. The 2012B proceeds will economically refund
certain outstanding LIPA senior lien bonds.
In addition, Fitch affirms LIPA's $5.85 billion in outstanding parity electric
system general revenue bonds at 'A'.
The Rating Outlook is Stable.
LIPA's senior lien bonds are secured by the net revenues of the electric
system (prior to subordinate lien debt). Senior and subordinate indentures do
not contain cross default provisions, providing a distinct legal separation
between the liens in the event of default. LIPA's ratings take into account
$350 million in subordinate lien variable rate bonds and $300 million
commercial paper program (each rated by Fitch based upon bank liquidity/credit
support); and $155.4 million in NYSERDA financing notes (payable by KeySpan
Corp, subsidiary of National Grid plc).
KEY RATING DRIVERS
TRANSMISSION AND DISTRIBUTION FOCUS: Since its inception in 1998, LIPA has
grown into a mature, predominantly transmission and distribution system. LIPA
has one of the most reliable electric systems in the Northeast.
FAVORABLE CUSTOMER DEMOGRAPHICS: LIPA serves a 1.1 million customer base
(primarily residential) that is well-diversified (no customer concentration)
and affluent (median income above the state and nation). The service area
economy is sound. However, Fitch recently downgraded Nassau and Suffolk
County's ratings to 'A+' from 'AA-' reflecting ongoing budgetary shortfalls.
INCREASINGLY DIVERSIFIED POWER SUPPLY: LIPA has made a concerted effort to
diversity its power purchase portfolio to include renewable resources and
off-island supplies from the lower cost PJM market. Reliance on energy solely
from National Grid owned plants has fallen from 62% in 1998 to 26% currently.
FINANCIALS TIGHTEN: For fiscal 2011, LIPA experienced unusually high storm
costs, coupled with 1% less in kwh sales. This resulted in lower cash flow and
debt service coverage (to 1.23x from 1.35x in prior year). Financial
performance should prospectively strengthen given anticipated receipt of FEMA
funds this year, a modest delivery rate increase (March 1, 2012), and $110
million lower annual debt service beginning in 2013.
HIGHLY LEVERAGED: LIPA's high debt burden and nominally high electric rates
remain a key credit concern. Debt to funds available for debt service (FADS)
was 19x for fiscal 2011, compared to Fitch's rating category median of 8.1x.
Positively, LIPA's net debt is expected to finally begin declining in 2013.
LEGISLATIVE PRESSURE ABATED: In February 2012, a state bill was enacted which
calls for periodic audits of LIPA's management and operations. Favorably, this
law does not alter LIPA's rate setting ability and by its passage, the
previous more onerous LIPA bill passed by the legislature last year was
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO IMPROVE FINANCIAL METRICS: LIPA's ability to achieve projected
stronger debt service coverage and liquidity levels in fiscal 2012 and
thereafter are key to maintaining the utility's 'A' rating.
INCREASED POLITICAL INTERFERENCE: LIPA operates in one of the more politically
vocal areas of the country, which remains a concern even though the recent
passage of the LIPA legislation has quelled the pressure for added
LIPA is one of the largest municipal electric distribution systems in the US,
serving a population base of more than 3 million people. Annual revenue
totaled $3.85 billion for fiscal year 2011. LIPA maintains a desirable, well
diversified customer base. Residential users account for 54% of revenues and
the single largest user accounting for less than 2% of revenues.
LIPA's service territory encompasses Nassau and Suffolk counties and the
Rockaways section of Queens in New York city. The service area remains
economically sound through the recent recession and continues to maintain
above average wealth and income levels. Energy sales fell in fiscal 2011 by
1%. This was possibly due to greater customer conservation. Fitch views the
one-year sales decline as credit neutral at this time. However, an unexpected
continued decline in sales could pose greater credit concern if sustained.
NEW OPERATIONS SERVICES AGREEMENT (OSA)
With the expiration of the existing Management (now referred to as
"Operations") Services Agreement approaching (Dec. 31, 2013), LIPA issued an
RFP in 2011 for bids on a new OSA and provider. LIPA received 16 bids for the
services contract. On Dec. 15, 2011, LIPA's Board of Trustees approved the
selection of Public Service Enterprise Group (PSEG) as the new OSA provider
beginning Jan. 1, 2014.
Transition work is already underway pursuant to a Transition Services
Agreement (TSA). LIPA is awaiting the anticipated final approval of the OSA
and TSA contracts by the NYS Comptroller. LIPA's selection of PSEG was driven
not only by cost effectiveness, but adequate reliability standards and the
ability for greater LIPA control of T&D operations and cost management.
SOME DEBT RELIEF ON THE HORIZON
LIPA'S debt financing needs to repair/replace an aging T&D infrastructure have
frequently outpaced scheduled debt amortization over the past 14 years,
resulting in a sustained highly leveraged utility system. However, this
leverage trend should reverse direction in fiscal 2013. Assuming LIPA
maintains modest new debt financing needs as projected, net debt will finally
(albeit gradually) begin to decline in fiscal 2013, by roughly $125 million
LIPA's annual debt service payments will fall as well, generating $110 million
in additional cash flow and boosting debt service coverage (excluding PILOT
payment) to more than 2.0x. LIPA and their Board of Trustees will be reviewing
potential uses for those funds, which could include accelerated debt
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria and [U.S. Public Power Rating
Criteria/Criteria for Rating Prepaid Energy Transactions], this action was
informed by information from [CreditScope, cite other sources]. Delete/Add
sources, as necessary. Only include "substantially material sources" of
information that were used to prepare the credit rating, unless the source is
confidential. A "source" is defined as the entity that provided the
information rather than the entity that created the information. Please list
the entity name versus the role unless the entity name is readily known from
the public bond documents.]
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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