Long Island Power Authority Seeks Lift From $1 Billion Sale

  • AAA rated debt secured by seperate charges levied on customers
  • Deal is second in a debt restructuring of up to $4.5 billion

The finances of the Long Island Power Authority, which has a lower credit rating than any other major U.S. public power provider, will get a boost from refinancing $1 billion of higher cost debt.

The Utility Debt Securitization Authority, created by New York to handle the financing, sold tax-exempt bonds Thursday backed by special charges assessed on LIPA’s 1.1 million customers. Because of that security, the bonds carry AAA ratings from Moody’s Investors Service, seven steps higher than LIPA’s revenue bonds. The refinancing saved LIPA customers $128 million, utility officials said.

“It’s a lower cost of capital,” LIPA Chief Financial Officer Thomas Falcone said in an interview. “There’s no mystery there.”

The refinancing is the second in a series of deals that will restructure as much as $4.5 billion of LIPA debt as interest rates hold near the lowest in half a century. By cutting its bond payments, the utility is seeking to boost its credit rating by as much as two levels over the next five years.

UDSA bonds maturing in 2035 and callable in 10 years priced at 2.97 percent, or about 0.9 percentage point more than top-rated bonds maturing in 10 years.

To help achieve that goal and reduce LIPA’s reliance on debt to pay for needed projects, the agency is considering a rate increase after a three-year freeze. The plan recommended by New York’s Department of Public Service proposes an increase of 0.8 percent in 2016 and 2.1 percent in each of 2017 and 2018. That would raise about $325 million.

Rating Increase

LIPA has set a goal of raising its Moody’s rating by two-levels to A2 within five years and reducing debt relative to assets. LIPA has the lowest grade of 10 major municipal utilities, including the Los Angeles Department of Water and Power and Seattle City Light, according to Public Financial Management, LIPA’s financial adviser.

LIPA’s finances have been strained since 1998, when it issued $6.7 billion of debt to acquire the Long Island Lighting Co., an investor-owned utility. Lilco spent $6 billion to build the Shoreham nuclear power plant in Suffolk County from 1973 to 1984. The site never opened because of community opposition. LIPA had about $7.4 billion in long-term debt as of April.

After Sandy

Hurricane Sandy in 2013 spurred an overhaul of the agency. The storm blacked out 90 percent of LIPA’s customers as falling trees downed transmission lines and flooding knocked out substations. A week after the storm struck, 200,000 customers remained without power.

As part of a reform plan, Newark, New Jersey-based Public Service Enterprise Group was hired to take over the electricity operations. LIPA’s role was limited to areas such as management of financial and legal obligations.

In 2015, the utility scored 584 out of 1,000 points in a J.D. Power residential customer satisfaction study, last among 17 utilities in its class, according to a July report by New York state Comptroller Thomas DiNapoli. The prior year, it scored 532.

“It’s a long slog,” Falcone said. ”It’s not something that you flick the switch and have customer satisfaction.”

In December 2013, the Utility Debt Securitization Authority sold about $2 billion of top-rated tax-exempt and taxable debt, saving LIPA about $130 million.

The deal marked the first time that a U.S. municipal utility used a special-purpose entity to issue tax-exempt bonds backed by customer charges that can’t be revoked or altered. Savings from that deal allowed LIPA to freeze rates through this year.

LIPA plans two more refinancings in March and September 2016 as more debt becomes callable, Falcone said.

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