Long Island Power Authority -- Moody places Long Island Power Authority under review for possible downgrade

New York, December 10, 2012 --

Opinion

Moody's investors Service today placed the ratings for the Long Island Power Authority (LIPA) under review for possible downgrade. Ratings impacted include the A3 rating on its approximately $6 billion senior lien Electric System Revenue Bonds, the Baa1 rating on its $550 million subordinate lien Revenue Bonds and the Baa2 rating on its approximately $155 million third lien NYSERDA bonds. The review for possible downgrade follows the recent resignation of LIPA's Chairman, which coming after the loss of three other Trustees since September and the recent resignation of its acting CEO and leaves the organization with the bare minimum number of Trustees needed to take action, and a potential vacuum of leadership at this most critical juncture following Superstorm Sandy.

As a result of Chairman Steinberg's resignation, LIPA's governing Board of Trustees, which has authority to establish the rates the LIPA charges its customers for electricity and to authorize its financial plans, will be reduced to eight members. The Board, as constituted by the 1986 LIPA Act, is comprised of fifteen members and requires a quorum of eight members voting in the affirmative to take action.

The costs of repairs to LIPA's systems as result of Superstorm Sandy are now estimated at approximately $950 million. Although at least 75% of these costs are eligible for reimbursement from the Federal Emergency Manage Agency (FEMA), the timing of this reimbursement is highly uncertain. As of this date, LIPA is still waiting for about $81 million of the approximately $116 million it requested from FEMA in conjunction with Hurricane Irene.

As incorporated in the former negative rating outlook, LIPA's liquidity and financial credit remain weak for its A3 rating. LIPA's credit profile has weakened further with the unexpected magnitude of Superstorm Sandy, the related strain on liquidity and the governance challenges that persist, all of which highlight the importance of a strong financial profile and liquidity position. Absent substantial concrete actions to improve financial strength, which we believe may be challenging given the political pressure on LIPA following Superstorm Sandy and the departure of its board members, the rating will likely move downward.

LIPA's immediate liquidity sources include about $440 million of cash on hand, and $100 million of unutilized commercial paper capacity. It remains possible that the FEMA reimbursement due from Irene may be received shortly. As previously noted, near-term liquidity is not being pressured as major cash outflows will not occur immediately, but rather over several months, as National Grid completes its billing process. At LIPA's upcoming December Board meeting, in addition to approving a budget for 2013, we expect management will seek Board approval for additional liquidity strengthening tools such as the ability to enter into $500 million of additional credit facilities, the ability to issue "FEMA Anticipation Notes" to bridge receipt of capital from FEMA, and authorization to term-out commercial paper freeing up additional readily available liquidity. We also think it is possible that the Board will provide an indication of its plans to address the recovery of storm costs not reimbursed by FEMA. To the extent the Board or management is unable to move forward on these important issues in timely fashion, the rating would likely be downgraded.

Of LIPA's fifteen Board positions, nine are appointed by the Governor, three are appointed by the Senate Majority Leader and three are appointed by the Assembly Speaker. Of the vacant seven positions, five appointees will come from the Governor while one each will come from the Senate Majority Leader and from the Assembly Speaker. We also observe that the terms of two of the existing eight trustees actually expired in 2011, but such terms continue to serve until the Trustee actually resigns or a successor is appointed. The inability of government officials to promptly address the expiring terms is, in our opinion, a governance deficiency, and one that could severely impede prompt decisive leadership, which we believe is needed given the current challenges at LIPA.

LIPA was established in 1986 as a corporate municipal instrumentality of the State of New York under the Long Island Power Authority Act (the LIPA Act). In 1998, the Authority became the retail supplier of electric service in most of Nassau and Suffolk Counties and the Rockaway Peninsula of Queens by acquiring the Long Island Lighting Company (LILCO) as a wholly owned subsidiary which does business as LIPA. LIPA's assets currently consist of a transmission and distribution system that is used to serve approximately 1.1 million customers in an approximately 1,230 square mile service territory (911 miles in Suffolk, 287 in Nassau and 32 in Rockaway), as well as an 18% (206 MW) interest in the Nine Mile Point Unit 2 nuclear facility.

The principal methodology used in this rating U.S. Public Power Electric Utilities With Generation Ownership Exposure published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Laura Schumacher VP - Senior Credit Officer Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653A.J. Sabatelle Senior Vice President Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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