Dec 10 - Fitch Ratings assigns an 'AA' rating to the New York Power
Authority's (NYPA) $25 million, series 2012 subordinate notes (taxable). Fitch
also affirms NYPA's outstanding $1.15 billion in senior lien power revenue bonds
The Rating Outlook is Stable.
The 2012 notes are expected to be sold this week via private placement to the
New York State Environmental Facilities Corporation (EFC). The EFC is a public
benefit corporation created by state statute in 1970 to provide low-cost capital
and technical assistance for environmental projects throughout NYS.
The subordinate notes are secured by a subordinated pledge of NYPA system
revenues, after payment of operating and maintenance expenses and after debt
service payments on senior lien revenue bonds.
KEY RATING DRIVERS
VERY LOW-COST POWER: NYPA is the largest nonfederal public power producer in the
U.S., serving a diverse group of customers throughout New York State. The
authority benefits from a largely 'green' hydropower resource mix that is
exceptionally low cost for the state and region (average of less than 2.0 cents
per kilowatt hour ).
STRONG FINANCIAL PERFORMER: NYPA continues to exhibit strong financial metrics,
with a solid balance sheet and healthy cash flow generation through FY2011. Debt
service coverage (prior to NYPA transfers to the state) has exceeded 2.0x for
the past four years despite recent economic recession. NYPA is operating ahead
of budget for the first nine months of FY2012, with debt service coverage
projected at 2.5x by year end.
SOLID CUSTOMER BASE: NYPA's revenue and customer base is diverse and consists
mainly of bilateral wholesale power sale contracts at terms that allow for at
least some rate adjustments when needed.
VARIABLE HYDROELECTRIC PRODUCTION: Hydroelectric output is inherently variable
as it relies on the Great Lakes' water levels. Positively, NYPA conservatively
bases financial projections on below-average hydro conditions.
CONSIDERABLE TRANSFERS TO NYS GENERAL FUND: NYPA's annual voluntary
contributions to the state general fund represent an ongoing key concern, as the
level of these transfers can vary significantly. The transfers are favorably
subject to NYPA Board approval and with consideration of 2.0x debt service
coverage prior to transfer. Transfers for FY2012 are thus far on budget.
MODERATELY HIGH VARIABLE-RATE DEBT: NYPA maintains a moderately high proportion
(39%) of variable-rate debt (mostly commercial paper ) to total debt, with
associated remarketing and interest rate risk. On a net basis, however, taking
into account financial hedges, the variable interest rate exposure declines to
LIBERAL BOND COVENANTS: NYPA's bond covenants are fairly liberal (i.e. no
required debt service reserve fund, nor additional bonds test). This risk is
mitigated by NYPA's fiscal conservatism, and solid liquidity and risk management
DEBT LIENS RATED SIMILARLY: Fitch does not differentiate NYPA's senior and
junior lien ratings given the similar legal covenants for both tiers of debt,
the issuer's maintenance of adequate liquidity, and the overall fiscally
conservative nature of NYPA.
WHAT COULD TRIGGER A RATING ACTION
UNDUE PRESSURE FROM STATE: Legislative or political pressure to materially
increase NYPA transfers to the state or imposition of unexpected energy
initiatives upon NYPA remain key credit concerns.
MATERIALLY LOWER HYDRO OUTPUT OR ENERGY MARKET PRICES: An unexpected material
decline in hydroelectric generation or precipitous drop in wholesale energy
prices is a credit concern as it would negatively impact NYPA's net margins.
DISRUPTION IN CP MARKET: Potential for material dislocation in the CP market is
a concern, given NYPA's high proportion of CP relative to total debt (at 32.7%
of total debt outstanding as of Nov. 30, 2012).
The New York Power Authority, a quasi-state agency, is the largest nonfederal
public power producer in the U.S. NYPA serves customers throughout New York,
including municipal, cooperative, and investor-owner utilities, industrial
users, public corporations, and out-of-state utilities. NYPA's customers are
served pursuant to bilateral wholesale power purchase agreements, most of which
to not contain take-or-pay type provisions. NYPA's annual revenues for FY2011
totaled more than $2.66 billion.
Proceeds from the 2012 subordinate notes will be held by NYPA in a special fund,
the State Parks Greenway Fund, for the benefit of the New York State Office of
Parks, Recreation and Historic Preservation (NYSPRHP). Pursuant to the 2005
renewal of NYPA's federal operating license for its Niagara hydroelectric
generation plant, NYPA was required to make annual payments of $3 million to the
NYSPRHP for 50 years. The 2012 subordinate note in effect consolidates a portion
of the NYPA payments into an upfront payment, to allow the NYSPRHP to use the
funds sooner for planned capital expenditures.
For the life of the 2012 notes (25 years), NYPA will make a $1.5 million annual
payment to the NYSPRHP and the remaining $1.5 million (of the original $3
million annual payment) will be used to meet debt service payments on the 2012
STRONG FINANCIAL PERFORMANCE AND LIQUIDITY
FY2011 net income strengthened to $235 million from $181 million in the prior
year. The main drivers for this increase were higher revenues (related to 10%
increased output at the Niagara hydroproject), higher non-operating income, and
lower non-operating expenses (decrease in net debt service).
For the first nine months of FY2012, financial performance is slightly ahead of
budget, primarily due to receipt of higher revenues on capacity sales and the
implementation of certain rate increases (offset by lower energy market prices
for surplus offsystem sales). Lake water levels remain below average, but
in-line with NYPA projections. Debt service coverage is projected to exceed 2.5x
after transfers to the state. Internal liquidity is solid and on target to
improve to $1.43 billion by FYE2012, from $1.16 billion in FYE2011. Cash on hand
is projected to rise to 245 days by FYE2012.
Prospectively, NYPA is projecting to maintain its solid debt service coverage
(of 2.0x or better) through 2016, based on conservative assumptions including
below-average hydro conditions, a manageable capital expenditure plan ($2
billion through 2016), and the implementation of moderate hydropower and
transmission rate increases. Fitch also reviewed a stress scenario incorporating
further reduced hydropower output, lower market electricity prices, and added
costs related to a new transmission project, and NYPA's debt service coverage
fell to just below 2.0x, but still solid for the rating category.
MANAGEABLE NYPA TRANSFERS TO STATE
Positively, NYPA's transfer to the state for FY2012 is likely to total $85
million, which is slightly less than the prior year estimate. Prospectively, the
transfers are projected at $65 million per year for 2013 and 2014.
Each year, NYPA and the state legislature essentially revisit and reset NYPA's
transfer level. Favorably, in May 2011 NYPA's Board adopted a new policy which
added a debt service coverage (minimum of 2.0x) reference point, in addition to
other indenture requirements, before any transfer of funds to the state.
Nonetheless, this transfer variability is a credit concern, particularly as NYPA
is operating through a period of below-average hydropower conditions and low
electricity market prices. Fitch currently rates New York State's general
obligation bonds 'AA' with a Positive Outlook.
SIZEABLE CP PROGRAM
NYPA's total CP authorization is substantial at $1.4 billion, and its liquidity
resources (internal and external) are minimally adequate to support its 'F1+'
short-term rating. However, it should be noted that NYPA's CP outstanding cannot
exceed the size of the bank revolving agreement (as per CP resolution). As a
result, the size of the bank revolver ($550 million) is more indicative of
NYPA's actual CP requirements.
NYPA's CP notes continue to remarket without issue, with an average maturity of
75 days and average interest rate (including external liquidity cost and
remarketing) of less than 100 basis points. NYPA's revolving line of credit is
with five major U.S. banks, four of which maintain 'F1+' short-term ratings by
Fitch . The bank revolving agreements expire Jan. 1, 2014. NYPA is not
expecting to materially increase CP note utilization through 2016.