The Long Island Lighting Co.'s almost $2 billion of unpaid federal taxes could cause New York State to reconsider its plans for a public buyout of the utility, credit raters said this week.
The state may have to rethink the proposed buyout because the unpaid taxes would significantly increase the size of the transaction, and make it more difficult for the state to meet its obligations to bondholders.
Additionally, the extra costs associated with a large tax liability could damage the state's ability to achieve its ultimate goal of reducing utility costs for residents of Long Island.
State officials have very little to say about the deferred taxes, or their impact on the buyout. "Regardless of the reason, the deal would not go forward unless there was an immediate 10% rate reduction," said Stephen Schoenholz, director of public relations for the New York Power Authority.
The authority would operate Lilco if the state completes the buyout, but Schoenholz declined to comment further. "We have said all we're going to say about this issue until we have the facts from Lilco," he said.
But credit market executives say they have enough facts to begin questioning the state's ability to complete both the buyout and a 10% rate reduction for Lilco's customers.
"The tax liability adds an element of uncertainty" to the deal, said Stephen Fedun, vice president in the global power group at Fitch Investors Service.
The state would need to obtain an Internal Revenue Service ruling to avoid payment of the deferred taxes, and many analysts say it is unclear if the cash-strapped federal government could turn away almost $2 billion of revenues.
As a result, the state would have to increase the size of the buyout to $11 billion from $9 billion, creating credit implications for the state, and possibly making the deal unworkable.
"It would be a liability [the state] would have to absorb," Fedun said. "Either the liability is reflected in the rates or becomes a part of the financing package."
Other analysts said that the state may not even complete the buyout if the federal government doesn't forgive the deferred taxes. "The economics of the takeover would evaporate if the state is liable for the deferred tax balance," said Curtis Moulton, a managing director in corporate utilities at Standard & Poor's Corp.
Last month, Gov. Mario M. Cuomo proposed the $21.50 a share buyout as a way of reducing utility rates for Lilco customers on Long Island. Cuomo said the deal would go forward only if a 10% savings for ratepayers could be achieved immediately.
Under the original plan, the Long Island Power Authority would finance the takeover by issuing $9 billion of tax-exempt revenue bonds. The New York Power Authority would operate the utility.
But Cuomo's plan never mentioned a potential $1.77 billion in deferred federal income taxes that Lilco carries on its books as part of the closing of its Shoreham nuclear power plant. The liability could boost the size of the deal to a whopping $11 billion.
At press time yesterday, the Democratic governor was running in a tight election race against his Republican opponent, state Sen. George Pataki.
Some observers have speculated that the Lilco buyout will be canceled if Pataki wins the election. Others say that Pataki may be willing to consider the buyout if it reduces utility costs for Lilco customers, who pay some of the highest electricity rates in the country.
No matter who wins the election, rating agency officials say, the deal could be faced with a number of problems stemming from Lilco's unpaid federal tax liability.
Not only would the state have to pick up the tab for the unpaid federal taxes, but the additional debt burden could have credit implications for New York Power Authority debt as well as the state, raters said.
Analysts say the authority or the state may have to place a guarantee on the Long Island authority bonds to complete the buyout. As a result, the buyout could have credit implications for the state and the power agency.
The state's proposal, for example, calls for the Long Island authority to sell revenue bonds supported by rate payments. And if utility rate payments are insufficient to support debt service on the bonds "that would have to be considered in an analysis of the state's GO bond rating," said Richard Marino, a director at Standard & Poor's.