The Long Island Power Authority plans to issue another $475.26 million of tax-exempt bonds backed by restructuring charges imposed on its retail electricity customers.
Proceeds will be used to repay some of the utility’s outstanding general obligation debt.
The bonds will be issued via the Utility Debt Securitization Authority, a special purpose entity created by the New York State Assembly and Senate in 2013. LIPA’s response to Hurricane Sandy also led the state to strip the utility of much of its staff, and day-to-day maintenance and operations were transferred to PSE&G, a utility based in New Jersey. UDSA was given the authority to impose a special charge over the next 30 years.
The Series 2016-B consists of 19 tranches of tax exempt notes with maturities ranging from June 2019 to December 2035; all are rated ‘AAA’ by Fitch Ratings.
RBC Capital Markets is the lead underwriter; Citi Group Capital Markets, Barclays, and Bank of America Merrill Lynch are co-underwriters.
The UDSA’s bonds are considered to be less risky than LIPA’s general obligation debt, much of which is rated single-A. Using proceeds from issuance of higher-rated UDSA debt to repay LIPA’s lower-rated debt is expected to result in savings to LIPA’s customers, according to Fitch.
In its presale report, the rating agency said it takes comfort from the fact that the restructuring charge is mandatory and is adjusted annually through a “true up” mechanism to ensure that collections are sufficient to pay interest and principal on the bonds, as well as fund the debt service and operating reserve accounts, regardless of the amount of electricity that customers use.
The annual true-up originally took place on Jan. 1, but has been changed to Nov. 15, according to Fitch. In addition, UDSA now has the ability to make true ups at mid-year, if it expects collections to be insufficient.
LIPA’s service area consists of Nassau and Suffolk counties and the Rockaway Peninsula in Queens, with a population of roughly 3.0 million people; electric service is provided to about 1.1 million customers.
Fitch could downgrade the UDSA bonds if the restructuring charge were to account for more than 20% residential customers’ bills. It is currently nowhere near that level, however. The initial charge would represent approximately 0.49 (cents/kWh), or 2.36% of the total residential bills.
There is a risk that commercial customers could reduce their consumption, resulting in a higher burden for residential custoemrs. However, Fitch believes that even if consumption by commercial customers were to fall 50%, the result would only be a “moderately higher” recovery charge for residential customers to approximately 0.65 (cents/kWh), or 3.12% of the total rate charged to residential customers.
UDSA is authorized to issue a total of $4.5 billion; to date it has issued some $3.7 billion. This deal will bring the total to $4.1 billion, leaving the agency an additional $838.8 million of capacity.