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Fitch Assigns ‘A’ Rating To Long Island Power Authority Bonds, Outlook Is Positive

Fitch Ratings has assigned an 'A' rating to Long Island Power Authority (LIPA) bonds. The rating outlook is Positive.

“The ‘Positive’ rating outlook assigned by Fitch shows that the sound fiscal policies set by LIPA's Board of Trustees have continued to de-lever the utility, while investing record amounts in a reliable and resilient electric grid for customers and maintaining electric rate adjustments below the rate of inflation,” said Thomas Falcone, LIPA CEO and Interim CFO.

LIPA assigned an 'A' rating to the following LIPA bonds:

  • Approximately $145 million electric system general revenue bonds series 2022A;
  • Approximately $100 million electric system general revenue bonds series 2022B (mandatory tender bonds);
  • Approximately $100 million electric system general revenue bonds series 2022C (floating rate mandatory tender bonds).

Proceeds from the series 2022A and 2022B bonds will be used to fund system improvements and pay the costs of issuance. Proceeds from the series 2022C bonds will be used to refinance existing debt and to pay the costs of issuance.

The series 2022A bonds will be sold with a fixed rate and amortize through 2044. The series 2022B will be sold with a fixed rate through the mandatory tender date. The series 2022C bonds will be sold with a floating rate of interest through the mandatory tender date.

LIPA will have the option to purchase the series 2022B and 2022C bonds on the respective mandatory tender dates.

In addition, Fitch affirmed the following LIPA ratings at 'A': Issuer Default Rating (IDR) and approximately $4.8 billion senior-lien electric system revenue and refunding bonds.

Fitch said that the Positive outlook reflects LIPA's improving leverage ratio and Fitch's expectation that the gradual but consistent deleveraging trend that began in 2015 will continue through 2026.

Leverage, measured by net adjusted debt-to-adjusted funds available for debt service, improved to 8.3x at year-end 2021 from 8.8x three years prior, Fitch said. The improvement is attributable, in part, to LIPA's strategy of budgeting to achieve higher fixed obligation coverage.

Going forward, leverage ratios are expected to trend below 8.0x in 2023, consistent with a higher rating, as performance continues to benefit from LIPA's revenue-decoupling mechanism (RDM) as well as modest but consistent rate increases designed to achieve higher fixed charge coverage, the rating agency said.

“LIPA's very strong service area, more disciplined approach to rate setting and authorized RDM should sustain its very strong revenue defensibility and overall performance even through periods of stress, further supporting its financial profile. LIPA's operating cost burden remains comparatively high within the sector. However, ongoing efforts to moderate costs and operating risk have been reasonably successful in recent years, and are factored in the rating,” Fitch said.

In 2021, Fitch Ratings revised its credit rating outlook on LIPA from “Stable” to “Positive.” Fitch affirmed its A rating and positive outlook in their August 2022 report, indicating the potential for an upgrade from A to A+ in the next two years. To put this into context, Fitch assigned a rating outlook of A- (Negative) to LIPA in 2013.

In 2015, the LIPA Board of Trustees approved a new financial policy, “Debt and Access to the Credit Markets,” to ensure that infrastructure projects are funded by a sustainable balance of debt and cash flow.

LIPA bought the Long Island Lighting Company, an investor-owned utility, in 1998 in an entirely debt-funded transaction. The Board's policy reduces leverage over time, with a goal of moving from a 95% debt to assets ratio today to below 70% by 2030.

LIPA said its financial policy is working and has significantly lowered the cost to borrow since it was instituted in late 2015 while resulting in four credit upgrades from all three rating agencies.

It has done so while continuing to invest a record $5.0 billion in the Long Island electric grid since 2015.