NEW YORK--()--Fitch Ratings has affirmed the ratings on the Long Island Power Authority's (LIPA) $5.9 billion of outstanding electric system revenue bonds at 'A'.
Fitch has also revised the Rating Outlook to Negative from Stable, reflecting the agency's view that the effects of Hurricane Sandy will challenge LIPA's already tight financial flexibility and frustrate the authority's efforts to achieve improved financial performance and metrics as forecast.
The electric system general revenue bonds are senior lien obligations of LIPA secured by the net revenues of the electric system, prior to the subordinate lien debt.
KEY RATING DRIVERS
STORM CHALLENGING DISTRIBUTION UTILITY: Hurricane Sandy hit the LIPA service area on Oct. 29, 2012 resulting in severe damage to the authority's system and power outages to more than one million customers. Restoration efforts have been extensive and involve more than 15,000 workers. As of Nov. 11, 2012, power had been restored to 95% of the system; 62,000 remain without power.
COST OF RESTORATION UNCERTAIN: It is still too early to predict the full measure of the storm's impact, including the cost of restoration and repairs, and loss of revenues. However, total costs are expected to exceed those related to Hurricane Irene in Aug. 2011 ($170 million) based on comparative outages (1 million vs. 500,000) and the increased workforce required to restore service.
SUFFICIENT LIQUIDITY TO MEET OBLIGATIONS: LIPA's liquidity appears sufficient to meet initial storm costs. Immediate liquidity includes over $500 million in cash reserves and $100 million availability under the authority's commercial paper program. LIPA expects to bolster liquidity further by yearend through a new $500 million credit facility. Total resources could therefore approach $1.3 billion, more than the expected restoration costs.
FEMA REIMBURSEMENT SUPPORTS CREDIT QUALITY: LIPA expects to receive reimbursement from the Federal government (through the Federal Emergency Management Agency (FEMA)) of at least 75% of eligible restoration costs. LIPA intends to seek maximum recovery. However inadequate or prolonged reimbursement, particularly given overdue reimbursements related to Hurricane Irene in Aug. 2011, would be a Fitch concern.
POLITICAL PRESSURE COULD LIMIT RATE INCREASES: Fitch expects LIPA's unreimbursed storm costs to be manageable and generally recovered from ratepayers. However, given the intense political pressure surrounding LIPA's storm response and the authority's historic objective to moderate already high electric rates, Fitch believes that LIPA's willingness to increase rates may be limited.
FORECAST IMPROVEMENT MAY NOT MATERIALIZE: Fitch is concerned that LIPA's high leverage and tight debt service coverage (DSC) may limit the authority's ability to absorb unreimbursed storm costs and achieve forecasted improvement in its financial metrics. Fitch's expectations have been that LIPA would achieve its forecasted DSC of nearly 2.0x and begin to reduce its sizable debt burden in 2013. Achieving these objectives, however, now appears more uncertain.
STRONG FUNDAMENTALS STILL UNDERPIN RATING: LIPA's rating continues to
reflect strong utility fundamentals including an improved power supply
mix, an affluent and well-diversified customer base, and approved rate
mechanisms to stabilize cash flow.
WHAT COULD TRIGGER A RATING ACTION
FINANCIAL METRICS AND FLEXIBILITY: Future rating actions will depend on LIPA's ability to maintain adequate financial flexibility, in particular the ability and willingness to raise rates, to achieve financial metrics consistent with the 'A' rating category.
For additional information on LIPA please see Fitch's research dated June 22, 2012.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria