Green Island Power Authority, NY -- Moody's assigns Baa2 to Green Island Power Authority, NY's Series 2022 bonds; outlook is stable

Rating Action: Moody's assigns Baa2 to Green Island Power Authority, NY's Series 2022 bonds; outlook is stableGlobal Credit Research - 26 Aug 2022Approximately $1.9 million bonds affected.New York, August 26, 2022 -- Moody's Investors Service assigns a Baa2 rating to Green Island Power Authority, NY's (GIPA) $1.9 million of Power System Refunding Revenue Bonds, Series 2022 (Federally Taxable) due 2033. The rating outlook is stable. Moody's intends to withdraw the Ba1 rating on the outstanding bonds (Series 2000, Series 2004 A, B, and C, and Series 2008 A and B) once these securities are defeased with the proceeds of this offering, existing cash, and the sale proceeds of the hydroelectric facility.RATINGS RATIONALEThe Baa2 rating assignment reflects the substantial improvement in prospective credit metrics and a reduction of operating risk for GIPA following the completion of the sale of its hydroelectric generating facility to Albany Engineering Corporation (AEC), the current operator of the plant. AEC is expected to purchase the plant for approximately $6.0 million. This amount, which comfortably exceeds the appraised fair market value for the plant of $2.4 million, along with existing cash and the proceeds from the Series 2022 offering will enable the authority to defease GIPA's outstanding debt and meaningfully reduce the authority's debt amount to $1.9 million from $9.0 million. The debt service coverage ratio (DSCR) is expected to average at least 2.2x a significant improvement from 1.2x in 2021. The debt ratio is expected to be around 60% as the reduction in debt is offset by a reduction in fixed assets. Such debt ratio is anticipated to decline with scheduled amortization. The three -year average for days cash on hand is expected to remain around 190 days.Completion of the transaction will lead to the termination of a lease agreement entered into with AEC in Oct 2015. Under this agreement, AEC is entitled to the revenues of the hydro facility in exchange for payments that would cover GIPA's debt service on the hydro facility bonds. As a result, ongoing counterparty risk from AEC payments which represented 26% of operating revenues in 2021 will be removed. The sale of the facility will also eliminate GIPA's operating risk exposure to the hydro plant as well as the potential for a planned expansion. While AEC has previously assumed these O&M and expansion responsibilities in the lease agreement, either party could have terminated this agreement within 30-days.The Baa2 rating further reflects GIPA's monopolistic position in a very small service area with below average socioeconomic indicators, competitive rates facilitated by a long-term contract for electricity supplied by the New York State Power Authority (Aa2 Stable) and a strong recovery compact including an ability to make monthly adjustments for purchased power in excess of base rate calculation. Offsetting these strengths include significant exposure to power purchased at day ahead rates potentially leading to volatile customer rates, rate regulation by New York State Department of Public Service (PSC) and limited history of seeking base rate increases for their distribution business.RATING OUTLOOKThe stable outlook reflects our expectation that the authority will maintain consistent financial metrics including a DSCR that averages at least 2.0x and days cash on hand that approximate 175 days on a consistent basis.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Improvement in the service area economy and lower commercial concentration.FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Coverage ratios falling below 1.5x on a sustained basis.- Average 3-year liquidity falling below 150 days cash on hand.- Significant debt issuance for capital improvement which weakens financial metrics on a sustained basis.LEGAL SECURITYSecured by net revenues of the power system. The indenture also provides a rate covenant of 115% and debt service reserve equal to the less of (1) 10% of original par on bonds outstanding, (2) maximum annual debt service and (3) 125% of average annual debt service.USE OF PROCEEDSThe proceeds from the series 2022 bond issuance will be used to refund a portion of outstanding bonds.PROFILEGreen Island Power Authority, NY (GIPA) is engaged in the distribution of retail electric power in the Village of Green Island. The authority acquires its base electric load from the New York Power Authority at below market rates under a supply contract that expires in 2040 and purchases incremental power supply on the open market, at day ahead rates, through the New York Independent Systems Operators (NYISO). Electricity purchased between NYPA and NYISO is split approximately 50/50. Purchase power costs incurred in excess of those costs included in the base rate calculation are passed on to the consumer at no profit or loss to the authority by means of a monthly purchase power adjustment.METHODOLOGYThe principal methodology used in the rating was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019 and available at https://ratings.moodys.com/api/rmc-documents/63746. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.The rating has been disclosed to the rated entity or its designated agent and issued with no amendment resulting from that disclosure.This rating is solicited. 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