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 at ‘AA’. 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. SECURITY: 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 12%. 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 practices. 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). CREDIT PROFILE 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. NEW-ISSUE DETAILS 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 notes. 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.