Tuesday, January 22, 2013

Will Sandy Storm Money Bail Out LIPA Re Shoreham?

The financial engineering required to privatize the LIPA could cost taxpayersif the state decides to bailout Long Island. Customers of the Long Island Power Authority in Nassau, Suffolk and parts of Queens counties suffered through prolonged blackouts during Superstorm Sandy thanks to the utility's widely lambasted mismanagement. Governor Cuomo earlier this month in his State of the State address tated that he wanted to "abolish" LIPA. But analysts believe that persuading a private company to buy the much-maligned utility would require the state to assume at least $4 billion of LIPA's $7 billion in debt from the Shoreham nuclear power plant closure.

A sale would also trigger nearly $1 billion in additional costs: early-termination fees paid to bondholders, as well as penalties for the derivatives contracts that would suddenly become void, according to people who have studied a privatization.

LIPA could a very hot property for publicly traded Consolidated Edison Inc., New Jersey's Public Service Enterprise Group or another utility seeking to expand. Its chief asset: a monopoly serving a region whose population is larger than 20 states. LIPA has 1.1 million customers and ranks as the second-largest government-owned utility after the Los Angeles Department of Water & Power.

The trouble is LIPA's balance sheet. Debt obligations are nearly twice the value of its $4 billion in assets, and its 19-to-1 debt-to-cash ratio is more than double the industry average.

Any private buyer would seek to raise rates so it could pay down debt, cover the costs of stormproofing LIPA's infrastructure—and generate a decent shareholder return. But higher rates are a nonstarter. Mr. Cuomo earlier this month demanded they be frozen as part of any privatization. The only way out of this box, analysts say, is for the state to assume a portion of LIPA's debt so a buyer gains some financial flexibility.  Could part of the $60 billion in Superstorm Sandy bailout money be used to bailout LIPA?  Sounds plausible, unless restrictions are tied to the federal money.

Mr. Mitnick suggests the state take on some or all of LIPA's obligations, at least assuming the $4 billion liability originally associated with the long-closed Shoreham nuclear-power plant. With a lower debt load, LIPA would surely attract plenty of suitors eager to own its transmission and distribution assets.

The state's debt load is $63 billion, according to a report earlier this month by state Comptroller Thomas DiNapoli, who said the state has the capacity to add only another $2 billion through next year.

Another knotty problem centers on paying off trading partners and investors if the utility is privatized. Like most utilities, LIPA has entered into lots of derivatives transactions to help hedge its exposure to fluctuating interest rates and energy prices. In the event of a privatization, those contracts would be voided, forcing the utility to pay $295 million in early-termination fees, according to a 2011 report for LIPA by the Brattle Group, a consulting firm.

It would be more expensive still to deal with LIPA's investors. In order to retire LIPA's approximately $7 billion in debt, the Brattle Group estimated that holders would have to be paid a $666 million premium in exchange for selling their bonds before maturity. (Crain's New York Business, 1/18/2012)

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