Just how much are Long Island residents willing to pay for their electricity?
That may be the most important question for investors in the Long Island Power Authority’s latest utility fee securitization. The $369.38 million of bonds on offer this week will be backed by an additional restructuring charge imposed on retail utility bills.
These charges, which were authorized by state law, are mandatory and are adjusted annually through a “true up” mechanism to ensure that collections are sufficient to pay interest and principal on the bonds, regardless of the amount of electricity that customers use.
What’s more, the state of New York has pledged that it will not take or permit any action that limits, alters or impairs the collection of the charges until the bonds have been repaid.
So it would require new state legislation to challenge legal protections to the restructuring charge, and this legislation would violate the state pledge. (New York does not have a referendum or initiative process by which voters could challenge the law directly.) Credit rating agencies view this risk as remote.
However, both Moody’s Investors Service and Fitch Ratings think that political pressure for such a change, while still low, could rise as the surcharges account for a larger portion of customers’ bills.
Since this is the sixth time LIPA has been authorized to impose a new restructuring charge, they are adding up.
The securitization law allows for LIPA to issue up to $4.5 billion in total; the utility has already raised over $4.1 billion in four previous transactions: $2 billion in 2013, $1 billion in 2015, and $1.1 billion in 2016. This offering will be the last under the current authorization.
LIPA expects the initial restructuring charge imposed to fund the latest bond offering to represent around 0.61% of the total monthly bill of a 1,000 kilowatt hour residential customer. Add that to the current restructuring charge for the 2013, 2015, 2016A and 2016B transactions, and that rises to approximately 9.64% of a 1,000 kWh residential customer’s
bill.
This percentage charge is relatively high compared to charges in other utility cost recovery bond transactions. For context, the three most recent utility cost recovery bond issuances that Moody’s rated — Duke Energy Florida Project Finance LLC, Entergy New Orleans Storm Recovery Funding I LLC, and the Louisiana Utilities Restoration Corporation Project/ ELL — had a cumulative initial recovery charge amounting to 2.5%, 2.5%, and 3.7% of a 1,000 kWh residential bill, respectively.
“A high cumulative recovery charge could incentivize a legal challenge to the restructuring charges or the securitization law, or could increase political pressure to rescind or change the securitization law through legislation,” the rating agency stated in its presale report.
Likewise, Fitch believes that “if the recovery charge becomes a significant portion of the total bill, the incentive to find ways to bypass the system and avoid the charge increases.”
However, this concern is mitigated by an offset rider reducing LIPA’s delivery charge in an amount equal to any increase in the restructuring charge, so as to keep customers’ total monthly bills stable, per Moody’s.
There’s a silver lining for utility customers: proceeds from the utility fee bonds will be used to retire general obligation debt that is not as highly rated, and so pays much higher interest. Over the long term, lower debt servicing costs should help keep electric rates low, all other things being equal.
A single series of notes will be issued in the transaction, dubbed Utility Debt Securitization Authority Restructuring Bonds, Series 2017. The notes are rated triple A by both Fitch and Moody’s and have an expected maturity of 2039.
Barclays is the lead underwriter; Citi Group Capital Markets, RBC Capital Markets, and Bank of America Merrill Lynch are co-underwriters.
Both rating agencies cite the compulsory nature of the restructuring charges, the affluence of LIPA’s residential customers, and the existence of a true-up mechanism as important drivers of their triple A ratings.
Investors also benefit from an operating reserve account equal to 0.5% of the principal balance of the notes and a debt service reserve account of 1.5%.
However, the size of the restructuring charge in relation to customers’ total bills, as well as to other utility fee bonds, is also a key consideration for Fitch. It suggested that it could downgrade the bonds should special tariffs exceed of 20% of total bills over a long period of time.
“Notably, given the volatility in commodity prices over the past few years, the level of tariff charge as a percentage of a customer’s bill may be subject to fluctuation,” the presale report states.
