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Fitch Revises Outlook On LIPA To Positive, Cites Improved Leverage Ratio

Fitch Ratings recently revised its outlook on the Long Island Power Authority (LIPA) from Stable to Positive, with the rating agency saying the Positive Outlook reflects LIPA's improved leverage ratio and Fitch's expectation that the deleveraging trend that began in 2015 will continue through 2025.

“Debt has been a stakeholder concern since LIPA acquired the investor-owned Long Island Lighting Company in 1998,” said Tom Falcone, LIPA’s Chief Executive Officer. “The Board adopted a plan in 2015 to reduce LIPA’s leverage and the cost of debt. That plan has saved customers over $500 million and achieved four upgrades of LIPA’s bond ratings,” he said.

“This new positive outlook from Fitch Ratings -- indicating another upgrade within the next year or two -- shows we continue to be on the right path on behalf of our customers,” Falcone said.

Falcone discussed the factors behind rating agencies giving LIPA a series of rating upgrades in recent years in an episode of the American Public Power Association’s Public Power Now podcast.

Rating agencies have not only recognized LIPA’s success at deleveraging its balance sheet, but also the fact that the public power utility has seen significant improvement in the areas of customer satisfaction and reliability, Falcone said in an interview with APPA in 2020.

Fitch Cites Leverage Improvement

Fitch said that despite the challenges related to the coronavirus pandemic and Tropical Storm Isaias that hit Long Island in August 2020, leverage, as measured by net adjusted debt-to-adjusted funds available for debt service (FADS), improved to 8.4x at year end 2020 from 8.8x the two years prior. The improvement was attributable, in part, to LIPA's strategy of budgeting to achieve higher fixed obligation coverage, the rating agency said.

“Going forward, leverage ratios are expected to trend below 8.0x in 2023, consistent with a higher rating, as performance continues benefitting from LIPA's revenue-decoupling mechanism (RDM) as well as modest but consistent rate increases designed to achieve higher fixed charge coverage,” Fitch 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 the periods of stress, further supporting its financial profile,” the rating agency said.

Fitch also said that anticipated benefits that could accrue as a result of renegotiating LIPA's operating services agreement with LIPA's system operator PSEG Long Island (PSEGLI) are factored in the rating. The changes were triggered by PSEGLI's poor response to Tropical Storm Isaias and follow a number of investigations, LIPA's notice to terminate the contract and an analysis of alternate options for managing its assets, Fitch noted.

LIPA's estimated costs incurred for Tropical Storm Isaias were $307 million, but the net financial impact of the storm will be limited as a result of Federal Emergency Management Agency (FEMA) reimbursements and other offsetting responses.

Fitch Rates LIPA Electric System Revenue Bonds “A”

Fitch also said that it assigned an “A” rating to the following LIPA bonds:

  • Approximately $368 million electric system general revenue bonds (tax-exempt fixed rate) series 2021A;
  • Approximately $175 million electric system general revenue bonds (mandatory tender, tax-exempt) series 2021B;
  • Approximately $195 million electric system general revenue bonds (federally taxable) series 2021C

Proceeds from the series 2021A bonds will be used to fund system improvements, refund existing debt and pay the costs of issuance. Proceeds from the series 2021B and C bonds will be used to fund system improvements and to pay the costs of issuance. All of the bonds will be sold with a fixed interest rate. The series 2021A and B bonds will amortize through 2042 and 2051, respectively. The series 2021C bonds will mature on March 1, 2023.

In addition, Fitch affirmed the following LIPA ratings at “A:” Issuer Default Rating and approximately $3.9 billion senior-lien electric system revenue and refunding bonds.