Moody’s Investors Service said Aug. 12 that it has upgraded the senior lien revenue bonds of the Long Island Power Authority (LIPA) to A3 from Baa1 and the subordinated lien revenue bonds to Baa1 from Baa2.
The ratings outlook for LIPA is “stable,” Moody’s went on to say.
The upgrades reflect the implementation of enhancements to LIPA’s cost recovery mechanisms that result in a more stable and predictable cash flow and a more resilient liquidity profile, Moody’s said.
“Other considerations that factored into the one-notch upgrade include improvements in LIPA’s operating performance, better customer satisfaction levels, more transparent and credit supportive regulatory relationships and an expectation for better financial performance on a sustained basis,” Moody’s said.
A primary catalyst for LIPA’s improved credit profile was the Jan. 1, 2016 implementation of a three-year rate plan, which called for modest electric distribution rate increases and automatic recovery mechanisms that provide protection against certain external factors.
Credit supportive automatic recovery mechanisms approved and implemented include a revenue decoupling mechanism (RDM) and a delivery service adjustment (DSA). Collectively, these mechanisms provide automatic cost recovery should certain external events occur, including revenue variations that result from changes in economic conditions, weather or energy efficiency programs as well as higher-than-budgeted storm costs, Moody’s said.
The upgrade also recognizes LIPA’s receipt of grant funds from the Federal Emergency Management Agency (FEMA) which along with internal generated cash flow sources and incremental debt will fund a capital investment program focused on storm hardening and enhancing system reliability, Moody’s said.
Because of the existence of the FEMA funds, currently held in a restricted cash account, the debt ratio is expected to continue its declining trend even while incremental debt is incurred to fund the capital investment program, the ratings agency said.
LIPA was established in 1986 as a corporate municipal instrumentality of the State of New York under the Long Island Power Authority Act (the LIPA Act).
In 1998, LIPA became the retail supplier of electric service in most of Nassau and Suffolk Counties and the Rockaway Peninsula of Queens by acquiring the Long Island Lighting Co. (LILCO) as a wholly owned subsidiary which does business as LIPA.
LIPA’s assets currently consist of a transmission and distribution system that is used to serve approximately 1.1 million customers in an approximately 1,230 square mile service territory (as well as an 18% (234 MW) interest in the Nine Mile Point Unit 2 nuclear facility.