As interest on LIPA's debt climbs to $348M, it looks to refinance

As some LIPA costs such as property taxes decline, the interest the authority pays on its $9.1 billion debt is expected to top $348 million this year, even as it moves to shift more debt to an affiliate with lower interest rates.

Interest expenses are expected to increase next year, too, to $355.1 million, LIPA reported last month, as the overall debt rises and LIPA moves to refinance old debt at better rates. Last year LIPA received state authorization to increase debt through an affiliated unit called the Utility Debt Securitization Authority. The UDSA has better bond ratings — triple A — because it can’t file for bankruptcy to avoid paying off its bondholders.

Under terms of the newly amended LIPA Reform Act, LIPA can now borrow up $8 billion under that debt authority, compared with a previous $4.5 billion. There is already around $3.8 billion in long-term debt under the UDSA, while LIPA itself holds $5.3 billion.

Most of the new borrowing of around $3.5 billion will be to refinance old debt at better rates, though LIPA also has the ability to include new storm hardening and other costs in the borrowing.

During a board meeting last month, LIPA chief executive officer Tom Falcone, who is also serving as interim chief financial officer, said the refinancing actions could save LIPA hundreds of millions of dollars, depending on the interest rates at the time of the bond issuance. Rising interest rates could limit the savings, he said, from a previously projected $550 million to around $350 million.

Either way, he said, “We’re going to get a lot of savings and that’s savings for customers.”

Rates likely won’t go down as a result, but LIPA ratepayers have seen increases at considerable lower than the rate of inflation, he said. “Hopefully, people’s wages are growing faster than their electric bills.”

To those who say LIPA’s $9 billion in long-term debt seems like too much, Falcone said such critics are missing the point. What they don’t see is that over the past 25 years, LIPA’s assets — the substations, transmission lines, poles — have increased in value to around $10 billion from $4 billion when LIPA took over from LILCO.

“Our debt is up, but our assets are up by quite a bit more,” Falcone said in an interview with Newsday.

It’s that ratio — the amount of debt relative to assets — that’s more important than the debt figure alone, he said, and the amount of debt is just right for the amount of assets LIPA now holds.

“A lot of times people think we’re just piling on more debt, blah blah blah, but the reality is everything costs more [and] our asset base grows with time,” he told trustees. “Debt isn’t going to fall, but what you really have to look at is debt relative to assets.”

But the legislators who approved LIPA’s ability to borrow more under the debt affiliate said it isn’t carte blanche to load up on borrowings.

“To have a hard cap [on new debt] was critical to us,” said Assemb. Fred Thiele (D-Sag Harbor), who sponsored the Assembly version of the bill, because “every dollar of additional debt is interest at a time when interest rates are starting to rise, and ratepayers will have to pay.”

“While right now LIPA is in a good cash position, we’re also in an extremely volatile economy right now, with interest rates up, so I think that for the sake of ratepayers rather than the rating agencies, it makes sense to keep your borrowing to a minimum. For things such as resiliency and refinancing, I’m in favor of it, but that isn’t support for open-ended debt.”

Falcone noted that LIPA, by changing its internal formula so that more of the longer-term projects such as resiliency are funded from cash rather than debt, is minimizing new borrowings.

“If you’re borrowing the right amount every year and paying down the debt as you go, you’re going to be in a good place,” Falcone said. 

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.