Bonds and Financing

Rating agencies recognize LIPA’s deleveraging efforts, other accomplishments, Falcone says

Rating agencies, which have given the Long Island Power Authority (LIPA) a series of rating upgrades in the last few years, 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, Tom Falcone, LIPA’s CEO, said in a recent interview with the American Public Power Association.

The interview also included Tamela Monroe, LIPA’s Chief Financial Officer, who outlined her priorities in her new role as CFO at the Authority.

Fitch Ratings, Moody’s Investors Service and S&P Global Ratings in July assigned ratings to LIPA Electric System General Revenue Bonds (Series 2020A, Series 2020B and Series 2020C). All three rating agencies said the outlook is stable.

“Rating agencies always look at things through the financial lens since that’s the most important lens to them. The fact is that we have de-levered the utility over the last five or six years pursuant to a board policy that was adopted for that goal and raising our credit ratings,” Falcone said in an interview with the American Public Power Association. The board took that action in 2015.

“I think the bigger context the rating agencies also are looking at is that we really just turned LIPA around,” he said.

“They appreciate the dramatic increases in customer satisfaction we’ve had over the last six years. We went from really the worst utility in the country to a very solid utility – really within a hair’s breadth of a top quartile, top twenty five percent utility,” Falcone noted.

LIPA previously had “mediocre reliability. We’ve now got excellent reliability.”

Moreover, LIPA has been able to invest in meeting New York State’s aggressive goals for clean energy.

“We’ve done all those things while deleveraging the utility and while maintaining roughly flat customer bills,” Falcone said.

“When you put all that together it’s very compelling and that’s why we’ve received four rating upgrades in the last few years,” he said.

The rating agencies are affirming “that we’re still in a good place and so they all just recently upgraded our rating last year and they’re maintaining that higher rating this year.”

Power demand and COVID-19

In its July 24 report, Moody’s noted that since the start of the pandemic earlier this year, reduced electric demand from LIPA’s commercial and industrial customers has been offset by increased residential demand.

Falcone was asked whether he expects this trend to continue during the pandemic.

“It’s really more commercial on Long Island,” with very few industrial customers, he noted.

“We were a particularly hard hit area back in in March and April. We’ve been less effected in the May, June, July timeframe, but certainly back in March and April, we were a particularly effected region of the country in New York City and the New York City suburbs, which are our service territory,” he said.

“Commercial demand was off as much as twenty percent while New York was on pause” due to the pandemic, he noted.

Commercial sales for LIPA are now off around ten percent, “so we’ve recovered roughly half of that as the economy has un-paused in four different stages.”

Residential demand “pretty much offsets the other decline,” Falcone said.

“If you were looking at it on a revenue basis, we’re actually about $2 million ahead on delivery revenues” through the end of June.

As for whether reduced demand from C&I customers will continue to be offset by increased residential demand, “it depends on what businesses and customers do and the economy.”

A severe recession is “going to effect electric sales. That said, when people aren’t at the office they’re probably at home and these trends seem fairly durable for right now,” Falcone said.

“We’d love to see a little more of the commercial demand just for the health of the Long Island economy. We’re in phase four of the reopening and it seems like a fairly stable trend at this point,” he said.

Fitch cites a more disciplined approach to rate setting

In its July 27 report, Fitch listed several factors that it said should sustain LIPA’s very strong revenue defensibility and overall performance even through the current and potentially future periods of stress, further supporting its financial profile and the final rating.

Among other things, Fitch cited a more disciplined approach to rate setting.

“In addition to really being disciplined about what our financial ratios are,” LIPA has also done a number of things in its rate setting design “for things like revenue decoupling, which covers weather and sales,” he said.

While weather and sales are not always predictable, LIPA’s board has recognized that “we’re a public power utility and our customers pay our average costs and if we can make our financial performance a little more predictable for investors, we’ll get higher bond ratings and be able to reduce our interest costs,” Falcone said.

“What we instead do is we have some automatic riders,” which are used to manage the total customer bill.

“Our rate setting policies are a little more flexible, but the flip side of that is that we manage the total customer bill and we’ve tried to keep the total customer bill relatively flat,” he said.

“That is that type of resiliency that they’re alluding to. So, for example, our commercial sales may be down. In a revenue decoupling mechanism that may lead to an adjustment to next year’s rates, but we’ll be looking at other offsets. We’ll be looking at the weather, we’ll be looking at our other costs and managing our budget.”

The end result is “a lot more predictability to our financial results, but that doesn’t alleviate the burden on management to manage the business to make sure that it’s still achieving the things that are necessary for customers.”

Strategies for maintaining a strong financial performance going forward

As for LIPA’s strategies for maintaining a strong financial performance going forward, “it’s really stay the course,” Falcone said.

“We have to continue to manage our fixed costs. We have to still meet our aggressive clean energy goals. We have to still invest in customer satisfaction and reliability. And we still need to do all those things while keeping our bills affordable.”

Falcone said that LIPA needs to aggressively manage fixed costs “in light of the pandemic, in light of the recession. There will be some things that we wanted to do that are new that maybe we’ll delay a year or two to manage in tighter circumstances. We’ll refinance some debt.”

LIPA’s bond offering happened on Monday, Aug. 3 and Tuesday, Aug. 4. LIPA completed a $602 million bond financing to fund the 2020 capital program as well as refinance certain outstanding bonds at lower cost.

The offering was very well received, with over $5.7 billion orders for the $602 million of bonds. The $113 million refinancing provided customers with $28 million of present value interest savings, helping to reduce the need for future rate adjustments.

Meanwhile, Falcone also noted that LIPA has announced some power plant closures starting in 2022 that involve excess generation, which helps manage costs to customers.

New CFO details priorities

LIPA’s Board of Trustees in July appointed Tamela Monroe as LIPA’s next Chief Financial Officer.

Monroe brings over 35 years of utility industry and public power experience, including senior-level positions in the areas of finance, investor relations, strategic planning, accounting, and power markets at two of the largest utilities in the country. 

LIPA is enjoying the highest credit ratings that it has ever seen, “we’ve had historic levels of investment in reliability and clean energy and there’s a refocus on reducing the cost of the debt to lower costs for our customers over time,” she said in the interview.

Monroe’s goal is to build on these accomplishments.

The cornerstone to LIPA’s financial plan is “controlling the amount of funding of capital with debt, maintaining liquidity to protect against adverse economic conditions, setting the debt service coverage ratios to support financial stability and the timely recovery of anticipated costs,” she said.