Approved Capital Budgets-2004 and 2005 Five Year Financial Projections-2004-2008 Executive Summary The revenue and expenditure forecasts contained herein represent the approved operating budget of the Long Island Power Authority and its subsidiaries (LIPA) for the year ending December 31, 2004 and the approved capital budgets for the years ending December 31, 2004 and 2005. Also included are projected statements of revenues and expenses and sources and uses of funds for the five-year period 2004-2008. The revenue budget incorporates actual and projected results for 2003, as normalized for the effects of weather, and forecasts of electric load additions and the expected effects of the Long Island Choice program and LIPA s demand side management/energy conservation initiatives. The revenue budget also reflects the current recovery of a portion of excess fuel and purchased power costs estimated to be incurred in 2004 as well as a portion of 2003 excess costs deferred for future recovery in accordance with LIPA s tariff. Expenditure forecasts contained in the budget incorporate those operation and maintenance programs, including initiatives planned for 2004, which are designed to meet system growth requirements and to further improve the levels of service provided to LIPA s customers. Highlights of the sales and revenue forecasts and approved operating and capital expenditure plans follow. Electric sales for 2004 are forecasted to increase to 19,307,665 MWH, or 1.1% over 2003 s budget and 1.7% over projected normalized sales for 2003. Sales to residential customers are estimated to grow by 5.2% while sales to commercial and industrial customers are forecasted to decline by 2.3% versus the levels contained in the 2003 budget. Finally, other electric sales, mostly consisting of sales to other public authorities, are estimated to decline by 3% as compared with the 2003 budget. Revenues for 2004 are forecasted to increase to $2.710 billion, or 5.6% over the 2003 budgeted level. Revenues are primarily from retail sales of electricity to the residential, commercial and industrial markets. Also included are revenues -1-
from electric sales to public authorities and for street lighting and revenues from non-electric sources, such as for pole attachments and late payment charges. Budgeted revenues also include the recovery on a current basis of a portion of 2004 s excess fuel and purchased power costs as well as those costs deferred during 2003, which are being recovered from customers over a ten-year period. Finally, budgeted revenues reflect $34.2 million of recoveries from Suffolk County customers as permitted under the Shoreham Property Tax Settlement and the effect of lower New York State gross receipts taxes, the product of legislation advocated and approved by Governor Pataki. Fuel and Purchased Power costs for 2004, before the impact of prior year deferrals, are budgeted at $1.251 billion, or 8.3% over the comparable 2003 budgeted amount. The budget is based on forecasted natural gas, fuel oil, nuclear fuel prices and the cost of purchased power. Also included are costs related to: generation capacity added by contract since 2002; electric power wheeling; non-owned transmission cable capacity payments and operations and maintenance activities; LIPA s share of New York ISO operating and administrative costs; services received under the Energy Management Agreement with KeySpan Corporation (KeySpan); LIPA s fuel hedging program, partially offset by forecasted financial settlements under the program; commissions paid on off-system sales; and a non-cash charge to match the revenues, before associated taxes, related to the recovery of 2003 s deferred excess fuel and purchased power costs, which are being recovered from customers over a ten-year period (see Revenues, above). Partially offsetting these costs are budgeted revenues from the sale of ancillary services, such as providing operating reserves, regulation and frequency response services and the sale of transmission congestion credits. Operations and Maintenance expenses for 2004 are budgeted at $660.4 million, a decrease of 1.6% as compared with the 2003 budgeted level. O&M expenses are comprised primarily of costs associated with the transmission and distribution system management and power supply agreements with KeySpan. In addition to the costs associated with operating LIPA s T&D system and providing generated and purchased power, these agreements include management fees and performance incentives related to system reliability, customer service, operating efficiencies and worker safety. Other major costs included in Operations and Maintenance expenses are those related to: LIPA s Clean Energy Program; the operation and maintenance activities associated with the Nine Mile Point 2 nuclear power generating plant, including amounts to provide for LIPA s share of costs associated with the future retirement of the plant; research and development activities; reserve accruals for potential losses related to bad debts and storm damage; and retail programs and market research activities. General and Administrative expenses for 2004 are budgeted at $40.5 million. This represents a decrease of 3.6% as compared with the budgeted level for 2003. General and Administrative costs consist primarily of outside engineering, -2-
financial, legal and other professional services and salaries, benefits and other LIPA employee-related costs. Also included are expenses related to the cost of public liability damage claims, office rent, communications, and other general and administrative activities. Depreciation and Amortization in 2004 is budgeted to decrease to $231.9 million, or.5% lower versus the budgeted 2003 level. This category of expense is comprised of depreciation of LIPA-owned electric assets, the amortization of the acquisition adjustment, and the budget year s contributions to the Nine Mile Point 2 nuclear decommissioning fund. Revenue Taxes for 2004 are budgeted at $54.1 million. This level reflects a decrease of 11.9% as compared with the prior year. These taxes are based on gross revenues received from the sale of electricity and tax assessments on other sources of revenues, including the recovery of fuel and purchased power costs incurred in prior years. The expense included in the budget is net of tax credits associated with sales made under the Power-for-Jobs program. The year-to-year decrease reflects the lower gross receipts tax rates associated with legislation advocated and approved by Governor Pataki in 2000. Payments in-lieu-of Taxes, or PILOTS for 2004 are budgeted at $158.3 million, an increase 3.9% as compared with the budgeted level for 2003. The expense levels reflect forecasts of real property-based taxes presently incurred by LIPA from various jurisdictions, including New York City (the Rockaways), Nassau and Suffolk Counties, towns, villages, school districts and special purpose districts. They also reflect the real property-based taxes being passed through to LIPA pursuant to its purchase power agreements for merchant-owned generation. Other Income and Deductions for 2004 are budgeted at $41.1 million. This represents a decrease of 10.1% as compared with the budgeted 2003 level. This category consists of non-cash carrying charges accrued on deferred balances related to the Shoreham Property Tax Settlement, earnings on LIPA s short-term cash investments and Nine Mile Point 2 decommissioning fund balances, net proceeds from the sales of emissions allowances and miscellaneous sources, such as rental income. The lower 2004 level is primarily the result of reduced earnings on LIPA s short-term investments expected as a result of lower interest rates and lower projected cash balances. Interest Expense for 2004 is budgeted at $298.5 million, a 7.7% decrease as compared with the 2003 budgeted level. The budgeted expense is based on forecasted levels of outstanding debt, related fees and the amortization of debt-related deferred charges and credits. The lower expense level reflects the savings LIPA has been able to achieve by restructuring its -3-
debt to take advantage of today s lower interest rates. The average level of debt outstanding during 2004 is forecasted at $6.947 billion. The effective interest rate is 4.214%. This debt level and rate compare with a budgeted debt level of $7.013 billion and an effective interest rate of 4.354% for 2003. Excess of Revenues Over Expenses of $20.0 million for 2004 is consistent with LIPA s tariff, which provides for the recovery of LIPA s excess fuel and purchased power costs up to the level sufficient to achieve revenues over expenses of $20 million. Cash Flow from Operations for 2004 is budgeted at $279.2 million and reflects cash generated from LIPA s budgeted operating results and the recovery of excess fuel and purchased power costs in an amount sufficient to achieve revenues over expenses of $20 million on a current, or real-time basis, versus the deferral approach used in the past. Capital expenditures, comprised primarily of construction and removal projects, are budgeted at $234.7 million for 2004. This represents a decrease of $16.3 million, or 6.5% versus the expenditure level approved for 2003. The capital expenditure budget for 2005 is $233.7 million, a decrease of $1.0 million, or.5% as compared with the expenditure level approved for 2004. Transmission and distribution system projects, which include the construction of new supply transmission interconnections and major substation and transmission system upgrades, total $210.3 million for 2004 and $212.3 million for 2005. The higher spending level for T&D system improvements for 2005 reflects the funding requirements for interconnections and other system improvements to accommodate the new generation capacity to be built on Long Island. The spending programs contained within LIPA s capital budgets continue to underscore LIPA s commitment to provide safe and reliable electric service, and to expand and upgrade the electric T&D system to serve the energy needs of existing and new customers. Capital expenditures, including the cost of capitalized nuclear fuel, related to LIPA s 18% share of the upstate Nine Mile Point 2 nuclear power plant are budgeted at $17.5 million in 2004 and $14.8 million in 2005, when fuel reloadings are scheduled to take place. These expenditure levels represent an increase of $12.4 million in 2004 and a decrease of $2.7 million in 2005 as compared to the level for the prior year. The remainder of the capital budget includes provisions for LIPA information systems, furniture, computer and other equipment and capitalized interest. The spending programs that comprise these budgets underscore LIPA s commitment to the provision of safe, reliable and affordable electric service to the residents and businesses of Long Island and the Rockaways. They incorporate the operating and capital outlays necessary to provide additional and reliable sources of electricity, while reflecting LIPA s commitment to -4-
containing or even reducing its controllable expenditure levels. For example, LIPA s non-fuel operating costs and interest expense for 2004 are 2.4% lower than the 2003 budgeted level. At the same time, LIPA s budget reflects its strong commitment to the role of conservation and new technologies in meeting the growing energy needs of its customers. Expenditures for the Clean Energy program, including peak load reduction rebates, are estimated to total almost $37 million in 2004. LIPA is ready to meet the challenges that the coming years will no doubt present. In spite of the cost pressures we continue to face with respect to fuel and purchased power, we will continue to work hard to meet the growing energy needs of Long Island and to make certain our customers continue to receive high quality service. Five-Year Projections of Revenues and Expenses and Sources and Uses of Cash are being presented for the first time this year and reflect LIPA s focus on a longer-term financial planning horizon. These projections indicate, assuming base rates remain unchanged in the five-year period, LIPA s FPPCA surcharge will require modest increases in 2005-2008, reflecting the growing demand for energy. The projected increases in the FPPCA surcharge in 2005-2008 are 1.4%, 0.0%, 1.0% and 1.6%, respectively. Actual results may differ from these projections. -5-
Approved Capital Budgets-2004 and 2005 Five Year Financial Projections-2004-2008 Table of Contents Schedule Schedule A-1 Statements of Revenues and Expenses A-9 Taxes and Payments in-lieu-of Taxes A-2 Sales and Revenues A-10 Other Income and Deductions A-3 Source of 2004 Revenue Dollar A-11 Interest Expense A-4 Use of 2004 Revenue Dollar A-12 2004 Average Cost of Debt A-5 Fuel and Purchased Power Costs A-13 Comparative Interest Rates A-6 Operations and Maintenance Expenses A-14 Cash Flow from Operations A-6.1 KeySpan Contracts-Operating Expenses B-1 Capital Expenditures A-6.2 Nine Mile Point 2 Operations and Maintenance Expenses B-2 Use of 2004 Capital Dollar A-6.3 Research and Development Expenses B-3 Use of 2005 Capital Dollar A-6.4 Clean Energy Program Expenses C-1 Cost Comparisons-1999 through 2004 A-7 General and Administrative Expenses D-1 Statements of Revenues and Expenses-Five Years A-7.1 Professional Services D-2 Statements of Sources and Uses of Funds-Five Years A-8 Depreciation and Amortization
Statements of Revenues and Expenses 2003 2004 Approved Projected Approved Ref. Revenues $ 2,566,281 $ 2,582,232 $ 2,710,006 A-2 Expenses Fuel and Purchased Power Costs 1,108,883 1,107,630 1,287,430 A-5 Operations and Maintenance Expenses 670,996 702,064 660,442 A-6 General and Administrative Expenses 42,073 43,877 40,541 A-7 Depreciation and Amortization 233,018 230,738 231,875 A-8 Revenue Taxes 61,414 62,061 54,110 A-9 Payments in Lieu of Taxes (PILOTS) 152,313 151,622 158,290 A-9 Total Operating Expenses 2,268,697 2,297,992 2,432,688 Operating Income 297,584 284,240 277,318 Other Income and Deductions 45,750 54,197 41,139 A-10 Interest Expense 323,312 318,437 298,457 A-11 Excess of Revenues Over Expenses $ 20,022 $ 20,000 $ 20,000 Debt Service Coverage Ratios (x): Senior Lien Debt 2.05 1.67 #REF! Senior Lien and Subordinated Debt 1.88 1.51 #REF! Total Debt 1.71 1.45 #REF! A-1
Sales and Revenues 2003 Approved % Chg. From Approved Projected 2004 Projected 2003 Sales of Electricity (MWh) Residential Sales 8,627,189 8,993,565 9,078,491 0.94 Commercial & Industrial Sales 10,031,697 9,572,480 9,803,847 2.42 Other Sales to Public Authorities/Street Lighting 438,479 460,565 425,327 (7.65) Total Sales of Electricity 19,097,365 19,026,610 19,307,665 1.48 Revenues ($ thousands) Residential Sales $ 1,152,093 $ 1,210,595 $ 1,242,874 2.67 Commercial & Industrial Sales 1,113,947 1,076,111 1,122,372 4.30 Other Sales to Public Authorities/Street Lighting 40,150 41,936 39,327 (6.22) Sales for Resale 2,110 6,496 2,610 (59.82) Deferral/(Recovery) of Shoreham Property Tax Settlement Costs 11,880 6,523 (34,164) (623.75) Wheeling Revenues 7,274 6,513 6,606 1.42 Pole Attachment Fees 3,178 4,093 2,550 (37.70) Late Payment Charges 3,204 3,765 3,675 (2.38) Service Activation Charges - - 3,064 N/M Miscellaneous Revenues 1,350 1,173 1,291 10.14 Recovery of Prior Year Deferred Fuel and Purchased Power Costs 154,471 150,166 37,493 (75.03) Current Recovery of Excess Fuel and Purchased Power Costs 76,624 74,861 282,308 277.11 Total Revenues $ 2,566,281 $ 2,582,232 $ 2,710,006 4.95 N/M=Not Meaningful A-2
Source of 2004 Revenue Dollar Residential Sales $0.45 Excess Fuel & Purchased Power Cost Recovery $0.11 Other Operating Revenues $0.03 Commercial & Industrial Sales $0.41 A-3
Use of 2004 Revenue Dollar Revenue Taxes & PILOTS $0.08 General & Administrative $0.01 Depreciation & Amortization $0.09 Fuel and Purchased Power $0.47 Interest Expense $0.11 Operations & Maintenance $0.24 A-4
Fuel and Purchased Power Costs 2003 Approved % Chg. From Approved Projected 2004 Projected 2003 Fuel Oil $ 156,563 $ 449,098 $ 366,801 (18.32) Natural Gas 264,985 264,379 248,129 (6.15) Purchased Power 414,045 319,611 296,459 (7.24) Wheeling and Capacity Charges (excl. Nine Mile) 196,037 185,281 206,823 11.63 Nine Mile Nuclear Fuel (incl. Disposal and Decomm. Costs) 9,112 7,864 8,452 7.48 Nine Mile Wheeling Charges 7,328 7,449 7,545 1.29 Y-49 and Y-50 Cable Operating Costs 21,597 24,873 24,140 (2.95) Fuel Hedging Program Costs 21,968 5,593 17,296 209.24 Fuel Hedging Program Financial Settlements (19,553) (45,931) (3,074) (93.31) Emissions Allowance Purchases 3,598 7,390 4,562 (38.27) ESCO Bill Credit Adjustment Payments 7,835 5,889 4,438 (24.64) Ancillary Service Revenues-Net (5,930) - (2,682) N/M Energy Management Agreement 11,079 7,449 7,766 4.26 ISO-Related Service Costs 48,470 47,638 47,150 (1.02) NYPA Transmission Adjustment Charge 10,913 7,741 8,600 11.10 Cost of Off-System Sales 5,180 14,551 6,315 (56.60) Barge Lease and Transportation Costs 100 252 200 (20.63) Clean Energy Peak Load Reduction Rebates 1,610 634 1,610 153.94 Other - 19,927 - (100.00) 1,154,937 1,329,688 1,250,530 (5.95) Recovery of Deferred Fuel and Purchased Power Costs 151,196 148,761 36,900 (75.20) Deferred Fuel and Purchased Power Costs (197,250) (370,819) - (100.00) Total Fuel and Purchased Power Costs $ 1,108,883 $ 1,107,630 $ 1,287,430 16.23 N/M=Not meaningful A-5
Operations and Maintenance Expenses Approved Approved 2003 2004 % Chg. Ref. KeySpan Management Services Agreement (1) $ 257,459 $ 242,572 (5.78) A-6.1 KeySpan Power Supply Agreement 317,865 317,865 - A-6.1 Nine Mile Point 2 O&M 27,328 29,398 7.57 A-6.2 Research & Development 4,853 2,586 (46.71) A-6.3 Clean Energy Program 32,608 36,171 10.93 A-6.4 Storm Damage Reserve 9,000 5,000 (44.44) (2) Uncollectible Accounts 12,524 12,130 (3.15) (2) Assessments 2,731 2,575 (5.71) (2) Long Island Choice Program 500 50 (90.00) (2) Customer Service Telephone Response Systems 287 187 (34.84) (2) Customer Care Services - 300 N/M (2) Economic Development 104 745 616.35 (2) Retail Programs and Market Research Activities 2,246 1,430 (36.33) (2) Load Research/Rates Tariffs 266 366 37.59 (2) Power Quality Program 220 175 (20.45) (2) Postage-Paid Remittance Envelopes 2,092 2,705 29.30 (2) O & M-Y49 Cable 120 120 - (2) O&M-Y50 Cable - 1,600 N/M (2) Accretion of Asset Retirement Obligation - 3,867 N/M (2) Miscellaneous 793 600 (24.34) (2) Total Operations and Maintenance Expenses $ 670,996 $ 660,442 (1.57) N/M=Not meaningful Notes: (1) Expenditures related to the Research & Development and the Clean Energy programs are included in the related budget area. (2) Not detailed on separate schedule. A-6
KeySpan Contracts-Operating Expenses Approved Approved 2003 2004 % Chg. Management Services Agreement (1) T&D System Operating Costs $ 284,453 $ 272,385 (4.24) Management Fee 10,000 10,000 - Synergy Savings (42,494) (47,213) 11.11 Non-Cost Performance Incentives 5,500 7,400 34.55 Total Management Services Agreement $ 257,459 $ 242,572 (5.78) Power Supply Agreement (1) Operation and Maintenance Expenses $ 317,253 $ 316,219 (0.33) Synergy Savings (3,388) (2,354) (30.52) Non-Cost Performance Incentives 4,000 4,000 - Total Power Supply Agreement $ 317,865 $ 317,865 - Energy Management Agreement (2) Operating Expenses $ 2,636 $ 3,150 19.50 Management Fees 3,693 1,500 (59.38) Synergy Savings (2,250) (1,884) (16.27) Non-Cost Performance Incentives 7,000 5,000 (28.57) Total Energy Management Agreement 11,079 7,766 (29.90) Total Contracts with KeySpan $ 586,403 $ 568,203 (3.10) Notes: (1) Expenses incurred under the Management Services and Power Supply Agreements are included as Operations and Maintenance Expenses. See schedule A-6. (2) Expenses incurred under the Energy Management Agreement are included as Fuel and Purchased Power costs. See schedule A-5. A-6.1
Nine Mile Point 2 Operations and Maintenance Expenses Approved Approved 2003 2004 % Chg. Refueling Outage Amortization $ 3,569 $ 3,879 8.69 Non-Outage Operating Expenses 22,904 24,803 8.29 Insurance 105 89 (15.24) Nine Mile Oversight 750 627 (16.40) Total Nine Mile Point 2 O&M Expenses $ 27,328 $ 29,398 7.57 A-6.2
Research & Development Expenses Approved Approved 2003 2004 % Chg. T&D and Customer Utilization Projects $ 3,125 $ 875 (72.00) NYSERDA 1,000 600 (40.00) Clean Energy/Energy Efficiency Projects 4,300 4,500 4.65 Base KeySpan Labor Included in MSA Budget 728 1,111 52.61 Total Research and Development Budget 9,153 7,086 (22.58) Less: R&D Projects Included in Clean Energy Program (4,300) (4,500) 4.65 Total Research & Development Expenses $ 4,853 $ 2,586 (46.71) A-6.3
Clean Energy Program Expenses Approved Approved 2003 2004 % Chg. Energy Efficiency Programs $ 19,165 $ 21,723 13.35 Peak Load Reduction Program (1) 687 500 (27.22) Low Income Conservation 2,800 2,700 (3.57) Research & Development 4,300 4,500 4.65 Advertising and Promotion 2,000 2,500 25.00 Program Administration 690 1,043 51.18 Base KeySpan Labor Included in MSA Budget 2,966 3,205 8.06 Total Clean Energy Program Expenses $ 32,608 $ 36,171 10.93 Note: (1) Excludes cost of customer rebates, which are provided for under Fuel and Purchased Power costs. A-6.4
General and Administrative Expenses Approved Approved 2003 2004 % Chg. Employee Salaries and Benefits $ 12,375 $ 11,986 (3.14) Other Employee Expenses 609 295 (51.56) Professional Services (1) 19,151 20,538 7.24 Office Rent 1,251 1,309 4.64 Telephone 245 266 8.57 Office Supplies, Printing, Postage and Messenger 457 486 6.56 Meetings, Conferences and Seminars 516 532 2.91 Equipment Leases and Maintenance 370 196 (47.02) Dues/Memberships/Subscriptions 170 175 2.94 Repairs and Maintenance 36 20 (44.44) Insurance 1,498 1,651 10.21 Injuries and Damages Reserve 1,500 2,000 33.33 NUSCO Cable Insurance 1,254 - (100.00) Communications 598 535 (10.54) Board of Trustees and Other Public Meetings 72 22 (69.44) Community Relations 175 109 (37.71) Sponsorships/Special Events 292 298 2.05 Investor Relations/Bond Trustee Expense 30 15 (50.00) Miscellaneous 1,474 108 (92.68) Total General and Administrative Expenses $ 42,073 $ 40,541 (3.64) N/M=Not meaningful Note: (1) See schedule A-7.1 for details. A-7
Professional Services (1) Approved Approved 2003 2004 % Chg. Accounting and Audit Services 2,900 $ 1,600 (44.83) Forensic Accounting Services 1,000 1,250 25.00 Rates and Tariff Design 200 550 175.00 Legal 4,332 3,861 (10.87) Communications 348 348 - Information Technology 1,085 565 (47.93) Telecommunications - 120 N/M Engineering 6,140 8,114 32.15 Risk Management-Insurance 92 141 53.26 Risk Management-Fuel 650 600 (7.69) Financial Advisor/Cash Management 1,650 2,950 78.79 Human Resources 150 60 (60.00) Market Research 50 - (100.00) Service Improvement - 50 N/M Long Island Choice - 150 N/M Storm Review Panel 150 75 (50.00) Business Continuity 75 - (100.00) Records Management 50 - (100.00) Miscellaneous 279 104 (62.72) Total Professional Services $ 19,151 $ 20,538 7.24 N/M=Not meaningful Note: (1) Professional services related to the Clean Energy Program have been included in the related budget area. A-7.1
Depreciation and Amortization Approved Approved 2003 2004 % Chg. Amortization of Acquisition Adjustment $ 112,681 $ 112,681 (0.00) Depreciation Expense-Plant-in-Service 115,837 115,671 (0.14) Depreciation Expense-Decommissioning Fund-Nine Mile Point 2 4,500 3,523 (21.71) Total Depreciation and Amortization $ 233,018 $ 231,875 (0.49) A-8
Taxes and Payments in-lieu-of Taxes Approved Approved 2003 2004 % Chg. Revenue Taxes $ 61,414 $ 54,110 (11.89) Payments in-lieu-of Taxes (PILOTS) Long Island and New York City $ 137,812 $ 145,326 5.45 Nine Mile PILOTs 4,901 3,780 (22.87) Merchant Power Plants 9,600 9,184 (4.33) Total PILOTs $ 152,313 $ 158,290 3.92 A-9
Other Income and Deductions Approved Approved 2003 2004 % Chg. Short-Term Investment Income $ 10,583 $ 5,070 (52.09) Carrying Charges on Deferred Shoreham Property Tax Settlement Costs 30,480 31,578 3.60 Sales of Emission Credits 2,593 1,005 (61.24) Interest Income on Nuclear Decommissioning Trust Fund 1,700 2,521 48.29 Miscellaneous Income and Deductions 394 965 19.80 Total Other Income and Deductions $ 45,750 $ 41,139 (10.08) A-10
Interest Expense Approved Approved 2003 2004 % Chg. LIPA Interest Expense from Schedule A-12 $ 305,360 $ 292,758 (4.13) Other Interest Expense NYSERDA $ 20,664 $ 8,075 (60.92) Debentures 22,140 - (100.00) Amortization of Deferred Debt Issue Costs/Discounts/ (Premiums) 79 (12,158) N/M Amortization of Deferred Losses (Gains) on Debt Redemptions 5,662 4,790 (15.40) Letters of Credit Fees 6,201 7,169 15.61 Broker/Dealer Fees on Auction Rate Bonds 1,750 2,534 44.80 Interest on Customer Security Deposits 2,163 1,150 (46.83) Bond Administration Costs and Bank Fees 1,258 798 (36.57) Remarketing Fees 750 789 5.20 Promissory Note due from KeySpan (42,804) (8,075) (81.13) Carrying Charges on Deferred Credits 3,592 5,427 51.09 Other 1,845 - (100.00) Total Other Interest Expense $ 23,300 $ 10,499 (54.94) Capitalized Interest 5,348 4,800 (10.25) Total Interest Expense $ 323,312 $ 298,457 (7.69) N/M=Not meaningful A-11
2004 Average Cost of Debt Series Type Maturity Senior Lien Debt Average Principal Outstanding Effective Interest Rate Interest Expense ($Thousands) ($Thousands) 1998 A Serial Bonds 2004-2016 $ 790,569 5.250% 41,503 1998 A Term Bonds 2018-2029 1,263,350 5.235% 66,136 1998 A Capital Appreciation Bonds (1) 2004-2028 163,532 4.976% 8,138 1998 B Serial Bonds 2004-2016 662,591 4.894% 32,429 1998 B Term Bonds 2018 57,145 4.749% 2,714 2000 A Capital Appreciation Bonds (2) 2004-2028 299,503 5.659% 16,948 2001A Serial Bonds 2013-2021 21,960 5.064% 1,112 2001 A Term Bonds 2025-2029 278,040 5.160% 14,346 2001 (B-K) (M-P) Auction Rate Bonds (3) 2033 700,000 1.625% 11,376 2001 L Term Bonds (4) 2033 116,000 5.375% 6,235 2003 A Serial Bonds 2004-2009 95,025 4.726% 4,491 2003 B Serial Bonds 2003-2014 499,249 4.954% 24,735 2003 C Serial Bonds 2013-2033 137,860 5.133% 7,076 2003 C Term Bonds 2033 185,520 5.050% 9,368 2003 D-H Variable Rate Debt 2029 293,625 2.567% 7,536 2003 I-O Auction Rate Debt 2029 293,600 2.567% 7,536 Total Senior Lien Debt $ 5,857,569 4.467% $ 261,679 Subordinate Debt Series 7A & 7B Variable Rate (5) 2025 $ 250,000 4.208% $ 10,520 Series 8 Mandatory Purchase 2004-2010 214,645 4.846% 10,401 Series 2001 1A-3B Variable Rate (3) 2033 525,000 1.625% 8,532 Commercial Paper Variable Rate (3) Various 100,000 1.626% 1,626 Total Subordinated Debt $ 1,089,645 2.852% $ 31,079 Total Average Debt Outstanding $ 6,947,214 4.214% $ 292,758 (1) Represents accreted value of original proceeds of $145.793 million, adjusted for partial refinancing in 2003. (2) Represents accreted value of original proceeds of $325.165 million, adjusted for partial refinancing in 2003. (3) Variable rates ranging from 1.50% to 1.75%. (4) The Authority has entered into a floating-to-fixed rate swap agreement to effectively offset the effect of the fixed-to-floating rate swap agreement which continues to be in force. (5) The Authority has entered into interest rate swap agreements in connection with the Series 7A & 7B Bonds pursuant to which the Authority makes a fixed rate payment based on a rate of 4.208%. A-12
Interest Rate 8.0% Comparative Interest Rates (As of 1/16/2004) 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% LIPA Fixed Rate Debt A Rated Municipal Tax Exempt Utility 20 Year-Bond Yield Bond Buyer 20 Year G.O. LIPA Variable Rate Debt 6-Month LIBOR Bond Market Association Index A-13
Cash Flow from Operations Approved Approved 2003 2004 % Chg. Excess Of Revenues Over Expenses $ 20,022 $20,000 (0.11) Add Back (Deduct) Non-Cash Items: (Deferral)/Recovery of Shoreham Property Tax Settlement Credits (11,880) 34,164 N/M (Deferral)/Recovery Fuel and Purchased Power Expense (46,054) 36,900 N/M Prepaid Fuel Hedging Program Costs-Net of Amortization (18,782) (3,979) 78.81 Prepaid Nine Mile Point 2 Refueling Outage Costs-Net of Amortization 3,569 (3,591) N/M Prepaid Nuclear Fuel Costs-Net of Amortization 6,032 (2,789) N/M Depreciation and Amortization 233,018 231,875 (0.49) Depreciation Expense-Decommissioning Fund-Nine Mile Point 2 (4,500) (3,523) (21.71) Accretion of Asset Retirement Obligation - 3,867 N/M Carrying Charges on Deferred Shoreham Property Tax Settlement Costs (30,480) (31,578) 3.60 Amortization of Deferred Debt Issue Costs (Premiums) 79 (12,158) N/M Amortization of Deferred Losses (Gains) on Debt Redemptions 5,662 4,790 (15.40) Interest on Capital Appreciation Bonds 30,480 25,086 (17.70) Capitalized Interest (5,348) (4,800) (10.25) Other 6,003 (15,100) N/M Total Non-Cash Items 167,799 259,164 54.45 Excess of Revenues Over Expenses-Cash Basis $ 187,821 $ 279,164 48.63 N/M=Not meaningful A-14
Approved Capital Budgets-2004 and 2005 Capital Expenditures Approved Approved Approved 2003 2004 % Chg. 2005 % Chg. Transmission Projects Transmission Interconnections-New Power Plants (Major Capital) $ - $ 2,000 N/M $ 14,220 611.00 Transmission Interconnections-Cable Projects (Major Capital) 13,500 - (100.00) - - Queens Substations and Lines (Major Capital) 2,075 4,350 109.64 - (100.00) Nassau Substations and Lines (Major Capital) 1,953 2,970 52.07 6,800 128.96 Western Suffolk Substations and Lines (Major Capital) 7,910 8,615 8.91 13,005 50.96 Eastern Suffolk Substation and Lines (Major Capital) 7,855 24,323 209.65 30,450 25.19 North Fork Substations and Lines (Major Capital) 29,350 10,000 (65.93) - (100.00) Other Transmission (Routine Capital) 15,226 13,132 (13.75) 12,696 (3.32) Other Transmission (Major Capital) 14,000 875 (93.75) 4,600 425.71 Total Transmission Projects 91,869 66,265 (27.87) 81,771 23.40 Distribution Projects Substations (Major Capital) 28,440 23,585 (17.07) 20,760 (11.98) Substations (Routine Capital) 3,404 8,520 150.29 5,615 (34.10) Electric Lines-New Customer Load (Routine Capital) 30,086 25,687 (14.62) 21,030 (18.13) Electric Lines-Other (Routine Capital) 46,992 55,650 18.42 52,399 (5.84) Purchase and Install Meters/Transformers (Routine Capital) 19,507 20,980 7.55 16,624 (20.76) Public Works 2,453 2,453-1,963 (19.98) Other Distribution (Routine Capital) 9,407 2,414 (74.34) 675 (72.04) Total Distribution Projects 140,289 139,289 (0.71) 119,066 (14.52) Project Funding for Emerging Work and Land Acquisitions 10,435 3,772 (63.85) 10,500 178.37 Additional Public Works Projects (beyond MSA) 1,000 1,000-1,000 - Total Transmission and Distribution Projects 243,593 210,326 (13.66) 212,337 0.96 Cost-Sharing and Other Contributions (5,233) - (100.00) - NM Capitalized Interest 5,348 4,800 (10.25) 5,400 12.50 Nine Mile Point Two Plant Additions/Replacements/Capitalized Nuclear Fuel 5,127 17,537 242.05 14,793 (15.65) LIPA Information Systems/Furniture and Equipment 2,176 2,061 (6.94) 1,126 (44.40) Total Capital Expenditures $ 251,011 $ 234,724 (6.49) $ 233,656 (0.46) N/M=Not Meaningful B-1
Approved Capital Budget-2004 Use of 2004 Capital Dollar Transmission Interconnections $.04 Distribution Projects $.57 Nine Mile Point 2 $.07 Other Capital Expenses $.05 Transmission Projects $.27 B-2
Approved Capital Budget-2005 Use of 2005 Capital Dollar Transmission Interconnections $.06 Distribution Projects $.51 Nine Mile Point 2 $.06 Other Capital Expenses $0.08 Transmission Projects $.29 B-3
Approved Operating and Capital Budgets-2004 Cost Comparisons 1999 Through 2004 (based on acutal and budgeted values) 1,500 1,400 1,300 Amount ($ in millions) 1,200 1,100 1,000 900 800 700 600 500 Total Fuel and Purchased Power Costs Other Operating Expenses Capital Expenditures 400 300 200 100 1999 2000 2001 2002 2003 2004 Years C-1
Five Year Financial Forecast Statements of Revenues and Expenses Approved Budget Projected 2004 2005 2006 2007 2008 Revenues $ 2,710,006 $ 2,766,211 $ 2,800,708 $ 2,856,384 $ 2,938,286 Expenses Fuel and Purchased Power Costs 1,287,430 1,300,976 1,308,255 1,324,584 1,369,443 Operations and Maintenance Expenses 660,442 665,507 680,008 699,372 719,492 General and Administrative Expenses 40,541 40,694 41,874 43,088 44,338 Depreciation and Amortization 231,875 238,075 245,690 254,475 262,464 Revenue Taxes 54,110 47,366 50,960 51,804 53,021 Payments in Lieu of Taxes (PILOTS) 158,290 167,854 170,927 179,739 186,697 Total Operating Expenses 2,432,688 2,460,472 2,497,714 2,553,062 2,635,455 Operating Income 277,318 305,739 302,994 303,322 302,831 Other Income and Deductions 41,139 46,678 48,475 47,515 49,596 Interest Expense 298,457 332,417 331,469 330,837 332,427 Excess of Revenues Over Expenses $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 Debt Service Coverage Ratios (x): Senior Lien Debt 2.23 2.36 2.18 2.16 2.13 Senior Lien and Subordinated Debt 1.95 2.14 1.99 1.98 1.95 Total Debt 1.91 2.10 1.96 1.94 1.92 FPPCA Surcharge % 13.3% 14.7% 14.7% 15.7% 17.3% Change from prior year 4.5% 1.4% 0.0% 1.0% 1.6% D-1
Five Year Financial Forecast Statements of Sources and Uses of Funds FUNDS PROVIDED FROM : Approved Projected Budget 2004 2005 2006 2007 2008 Excess Of Revenues Over Expenses $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 Plus (Minus) Non-Cash Items: Amortization of Deferred Shoreham Property Tax Settlement Credits 34,164 34,560 35,251 35,938 36,725 Carrying Charges on Deferred Shoreham Property Tax Settlement Costs (31,578) (32,344) (32,488) (31,044) (32,916) Deferred Fuel Cost Reconciliation 36,900 36,900 36,900 36,900 36,900 NMP2 Amortized Nuclear Fuel Expense 6,811 7,482 6,102 6,663 6,290 Prepaid NMP2 Refueling Outage Costs-Net of Amortization (3,591) 3,642 (1,319) 3,875 (179) Asset Retirement Obligation Accretion - FASB 143 3,867 4,099 4,345 4,606 4,882 Depreciation and Amortization 231,875 238,076 245,690 254,475 262,464 Other (15,100) 5,100 5,300 5,500 5,700 Debt Service Interest Expense 306,532 340,492 339,544 338,912 340,502 Proceeds of Bonds and Notes - 175,000 183,825 136,251 108,364 Total Sources of Funds before Interest Expense $589,880 $833,007 $843,150 $812,076 $788,732 FUNDS USED FOR : Prepaid Fuel Hedging Program Costs-Net of Amortization 3,979 (403) - - - Funding for NMP2 Plant Decommissioning 3,523 3,523 3,523 3,523 3,523 Bank and Related Fees 11,290 11,290 11,264 9,764 9,764 Debt Service Payments 462,128 468,315 506,693 520,626 532,799 Capital Expenditures 220,288 219,104 304,222 272,697 241,075 NMP2 Cash Fuel Expense Capital Expenditures 9,600 9,152 1,399 9,201 8,820 Change in cash position due to Operating, Financing and Investing Activities (120,928) 122,026 16,049 (3,735) (7,249) Total Uses of Funds $589,880 $833,007 $843,150 $812,076 $788,732 D-2