Fitch upgrades LIPA ahead of its only deal this year
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With a fresh leadership team, an expiring third-party manager contract and a recent upgrade from Fitch, the Long Island Power Authority is set to price a billion-dollar bond issuance on Tuesday.
LIPA’s $1.021 billion of electric system general revenue bonds will include $736 million of Series 2024A, tax-exempt fixed-rate bonds and $285 million of Series 2024B, tax-exempt fixed-rate mandatory tender bonds.
Series A will feature maturities from 2024 through 2044, with term bonds in 2049 and 2054; Series B will have term bonds in 2049. Proceeds from Series A will fund capital improvements and refund all or part of LIPA’s Series 2014A bonds. Series B will retire, by purchase and cancellation, LIPA’s Series 2019B mandatory tender bonds.
Bloomberg News
BofA Securities will be bookrunner for the deal, with Barclays and Ramirez as co-senior managers and Goldman Sachs, J.P. Morgan, Loop Capital Markets, Morgan Stanley, RBC Capital Markets, Siebert Williams, TD Securities and Wells Fargo as co-managers.
Nixon Peabody is the bond counsel and PFM serves as municipal advisor.
The bonds are rated A2 by Moody’s Investor Service, A by S&P Global Ratings, and A-plus by Fitch Ratings
In upgrading LIPA to A-plus from A, Fitch said, it “reflects its improved leverage ratio and Fitch Ratings’ expectation that the gradual but consistent deleveraging trend that began in 2015 will continue through 2028. “Leverage, measured by net adjusted debt to adjusted funds available for debt service, improved to 7.8x at YE 2023 from 8.8x five years prior. The improvement is in part attributable to LIPA’s strategy of budgeting to achieve higher fixed-obligation coverage.”
The deal is fairly routine for LIPA, which issues bonds for its capital programs around once a year, and sometimes more for refundings, according to Chief Financial Officer Donna Mongiardo. Vinay Dayal, LIPA’s director of finance and treasury, said he expects the deal to perform well.
“We really have positive expectations on it, because of the winds on our back with the Fitch upgrade,” Dayal said. “We have great financial metrics. And we expect a good order book.”
But beyond the deal, the power authority is managing many less routine developments.
LIPA is a corporate agency and a political subdivision of the state of New York, but its management, power delivery and customer service are managed by a third-party contractor. Since 2014, that contractor has been the Public Service Enterprise Group Inc., but PSEG’s contract expires at the end of 2025.
The New York state legislature considered moving all of LIPA’s operations in-house when its contract with PSEG expires. But despite studies suggesting that it could save money, the bill to make LIPA public stalled in the legislature.
Accordingly, in May, the authority issued a request for proposals for a new five-year power supply management services contract. Bids are due in September, and LIPA will choose a winner in June. The contract may be with PSEG again, Mongiardo said.
The new contract will have certain differences from LIPA’s current one, according to S&P director Jeffrey Panger. For instance, the contract will shift some of the risks related to regulatory issues and natural disasters from the ratepayers to the third-party operator, he said.
“All of the issues that were in the last transition with the last contract, we will not encounter this time because the contract is just designed differently,” Mongiardo said. “So we’re on a stable path to just keep moving forward with our fiscal sustainability policy, no matter who manages our operating contract.”
But while LIPA fields contract bids and prepares its bond issuance, it’s also dealing with an upheaval in leadership.
This spring, LIPA’s CEO of 10 years, Tom Falcone, resigned, with
Tom Locascio, LIPA’s vice president of corporate affairs, declined to say why the authority saw so many departures and stressed current LIPA leadership has experience in the bond market and running utilities.
“The important part is there’s been, from an operations standpoint, continuity in operations,” Locascio said. “We have a talented leadership team here at LIPA that has just an incredible depth of experience, and we continue to work hard every day for our customers to deliver value in what we do.”
Mongiardo has worked at LIPA for 22 years; Dayal joined LIPA three years ago and has around 25 years of experience in the muni market as issuer with the New York Metropolitan Transportation Authority and the New York Power Authority. Manager of Finance Rehan Ahmad joined two months ago, moving from Loop Capital Markets, where he had worked for 15 years.
“I’ve been here 22 years, so I have experience with all the facets of the finance area here,” Mongiardo said. “We’re operating as usual in the finance department, and just proceeding with our long-term fiscal sustainability policies. And I’ve been here when we set them up, and I’ll be here until we carry out our long-term goals.”
The power authority has also had to deal with New York’s aggressive decarbonization goals. The state wants 70% of its electricity generated from renewable energy sources by 2030, and a zero-emissions electric system by 2040.
But as its high ratings and recent upgrade from Fitch show, rating agencies see many underlying strengths in the authority’s finances.
“Their coverage of fixed costs is remarkably stable. And so, between that and liquidity, which is quite robust, those serve as kind of the chief underpinnings for the credit,” S&P’s Panger said.
LIPA’s service areas in Suffolk and Nassau counties have higher average incomes than most of New York, which means the authority has flexibility in rates, Panger added.
LIPA’s business model also provides advantages, Mongiardo said.
“We still continue to seek out grants continuously. We were just awarded a mitigation grant from FEMA for $405 million,” Mongiardo said. “These are all options that are afforded to us as a state utility that normally wouldn’t be provided [to a private company like] ConEd.”
