Down Debt

As interest on LIPA’s debt soars to $348 million, it seeks refinancing

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

Interest charges are also expected to rise next year to $355.1 million, LIPA reported last month, as overall debt increases and LIPA prepares to refinance old debt at better rates. . Last year, LIPA received state approval to increase debt through an affiliated unit called the Utility Debt Securitization Authority. The UDSA has better bond ratings – triple A – because it cannot file for bankruptcy to avoid paying off its bondholders.

Under the recently amended LIPA Reform Act, LIPA can now borrow up to $8 billion under this debt authority, up from $4.5 billion previously. There is already about $3.8 billion in long-term debt under UDSA, while LIPA itself holds $5.3 billion.

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

At a board meeting last month, LIPA chief Tom Falcone, who also serves as acting chief financial officer, said the refinancing actions could save LIPA money. hundreds of millions of dollars, depending on the interest rates at the time the bonds were issued. Rising interest rates could limit savings, he said, from a previously projected $550 million to about $350 million.

Either way, he said, “We’re going to have a lot of savings and those are savings for customers.”

Rates likely won’t drop as a result, but LIPA taxpayers have seen increases significantly below the rate of inflation, he said. “Let’s hope people’s salaries go up faster than their electricity bills.”

LIPA CEO Tom Falcone at the Climate Action Council Public Hearing at Brookhaven Town Hall in Farmingville on April 6, 2022.
Credit: Newsday/Steve Pfost

For those who say LIPA’s $9 billion long-term debt seems too high, Falcone said those criticisms miss the point. What they don’t see is that over the past 25 years, LIPA’s assets – substations, transmission lines, poles – have grown in value to about $10 billion, compared to $4 billion when LIPA took over from LILCO.

“Our debt has gone up, but our assets have gone up a bit more,” Falcone said in an interview with Newsday.

It is this ratio – the amount of debt to assets – that is more important than the debt figure alone, he said, and the amount of debt is just for the amount of assets that LIPA now holds.

“A lot of times people think we’re just racking up more debt, blah blah blah blah, but the reality is everything costs more [and] our asset base grows over time,” he told directors. “The debt is not going to go down, but what you really need to look at is debt versus assets.”

But lawmakers who approved LIPA’s ability to borrow more under affiliated debt said it was not carte blanche to stock up on borrowing.

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

“While LIPA is currently in a good cash position, we are also in an extremely volatile economy at the moment, with interest rates rising, so I think for the benefit of taxpayers rather than the rating agencies , it makes sense to keep your borrowing to a minimum. For things like resiliency and refinancing, I’m in favor of that, but it’s not support for open-ended debt.

Falcone noted that LIPA, by changing its internal formula so that more longer-term projects such as resilience are funded with cash rather than debt, minimizes new borrowing.

“If you borrow the right amount each year and pay down the debt as you go, you’ll be in a good position,” Falcone said.