ML011860146
| ML011860146 | |
| Person / Time | |
|---|---|
| Site: | Nine Mile Point  |
| Issue date: | 12/31/2000 |
| From: | Long Island Power Authority |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| -RFPFR | |
| Download: ML011860146 (47) | |
Text
Long Island Power Authority and Subsidiaries Consolidated Financial Statements and Other Financial Information December 31, 2000 and 1999
Long Island Power Authority and Subsidiaries Index Section I. Long Island Power Authority Consolidated Financial Statements Report of Independent Accountants 1 2
Statements of Financial Position Statements of Revenues, Expenses, and Changes in Retained Earnings/(Accumulated Deficit) 3 4
Statements of Cash Flows 5
Statements of Capitalization 6-36 Notes to Consolidated Financial Statements Section H. Other Financial Information 37 Report of Independent Accountants on Other Financial Information 38 Consolidating Statement of Financial Position Consolidating Statement of Revenues, Expenses, and Changes in 39 Retained Eamings/(Accumulated Deficit) 40 Consolidating Statement of Cash Flows 41 Consolidating Statement of Capitalization Section MII. Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Consolidated Financial Statements Performed in 42 Accordance with Government Auditing Standards.
I pRCEWATERHOUSECCOPERS
- PricewaterhouseCoopers LLP 401 Broad Hollow Road Melville NY 11747 Telephone (631) 753 2700
-acsimile (631) 753 2800 Report of Independent Accountants To the Board of Trustees of the Long Island Power Authority and Subsidiaries In our opinion, the accompanying consolidated statements of financial position and of capitalization and the related consolidated statements of revenues, expenses and changes in retained earnings/
(accumulated deficit) and of cash flows present fairly, in all material respects, the financial position of the Long Island Power Authority and its subsidiaries (collectively, the "Company") at December 3 1, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In accordance with Government Auditing Standards, we have also issued our report dated March 22, 2001 on our consideration of the Company's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an be integral part of an audit performed in accordance with Government Auditing Standards and should read in conjunction with this report in considering the results of our audit.
March 22, 2001
Long Island Power Authority and Subsidiaries 2 Consolidated Statements of Financial Position (Thousands of Dollars)
December 31, 2000 1999 Assets
$ 2,197,656 $ 2,099,204 Utility Plant, net 942 1,042 Property and Equipment, net Current Assets 97,850 165,135 Cash and cash equivalents 277,074 365,275 Investments Accounts receivable (less allowance for doubtful 208,644 200,535 accounts of $21,480 and $19,480, respectively) 50,251 48,826 Fuel inventory 1,754 132 Interest receivable 2,085 4,831 Prepayments and other current assets 637,658 784,734 Total Current Assets 602,427 602,427 Promissory Note Receivable 32,789 20,149 Nonutility Property and Other Investments 67,198 75,744 Deferred Charges Regulatory Assets 335,061 233,631 Shoreham settlement 125,600 (22,013)
Fuel and purchased power cost recoverable (payable) 460,661 211,618 Total Regulatory Assets Acquisition Adjustment (net of accumulated amortization of 3,643,342 3,790,405
$452,169 and $305,106 respectively) $ 7,642,673 $ 7,585,323 Total Assets Capitalization $ 7,218,889 $ 6,990,128 Long-term debt (61,670) 58,870 (Accumulated deficit)/Retained earnings 7,157,219 7,048,998 Total Capitalization Current Liabilities 119,830 186,426 Current maturities of long-term debt 86,412 46,755 Due to KeySpan 89,547 121,340 Accounts payable and accrued expenses 29,163 42,135 Accrued taxes 51,925 54,683 Accrued interest 24,550 23,094 Customer deposits 401,427 474,433 Total Current Liabilities 60,955 52,625 Deferred Credits 23,072 9,267 Claims and Damages Commitments and Contingencies $7,642,673 $7,585,323 Total Capitalization and Liabilities The accompanying notes are an integral part of these financial statements.
Long Island Power Authority and Subsidiaries 3 Consolidated Statements of Revenues, Expenses and Changes in Retained Earnings/(Accumulated Deficit)
(Thousands of Dollars)
Twelve Months Ended December 31, 2000 1999
$2,199,741 $2,278,978 Electric Revenue Expenses Operations - fuel and purchased power 883,673 713,303 638,627 684,789 Operations and maintenance 33,162 30,551 General and administrative 210,025 208,295 Depreciation and amortization 34,209 119,052 Capital recovery amortization 230,319 244,767 Payments in lieu of taxes (164,006)
Rebates recoverable 2,028,285 1,838,481 Total Operating Expenses 171,456 440,497 Excess of operating revenues over expenses Other income, net 31,713 30,431 Investment income 18,423 19,025 Other 49,456 50,136 Total other income, net Excess of revenues over expenses before interest 221,592 489,953 charges and (credits) and extraordinary gain Interest charges and (credits) 322,095 306,966 Interest on long-term debt, net 27,371 34,342 Other interest (5,646) (2,559)
Allowance for borrowed funds used during construction 343,820 338,749 Total interest charges Excess of (expenses over revenues) revenues over expenses (122,228) 151,204 before extraordinary gain 1,688 7,721 Gain on early extinguishment of debt (120,540) 158,925 Excess of (expenses over revenues) revenues over expenses Retained earnings/(Accumulated deficit)
Beginning 58,870 (100,055)
$ (61,670) $ 58,870 Ending The accompanying notes are an integral part of these financial statements.
4 Long Island Power Authority and Subsidiaries Consolidated Statements of Cash Flows (Thousands of Dollars)
Twelve Months Ended December 31, 2000 1999 Operating Activities S (120,540) $ 158,925 Excess of (expenses over revenues) revenues over expenses Adjustments to reconcile excess of (expenses over revenues) revenues over expenses to net cash provided by operating activities (1,688) (7,721)
Gain on early extinguishment of debt 208,295 210,025 Depreciation and amortization 34,209 119,052 (91,830) (233,631)
Capital recovery amortization 30,067 9,439 Shoreham Credits (280) 13,644 Amortization of cost of issuing and redeeming securities Other (8,109) 7,867 Changes in operating assets and liabilities Accounts receivable, net (1,425) (21,041)
Fuel inventory (147,613)
(31,793) 78,717 Fuel and purchased power costs recoverable (payable) 39,657 (28,285)
Accounts payable and accrued expenses Due to KeySpan (12,972) (36,885)
Accrued taxes (2,758) (8,705)
Accrued interest 31,748 16,523 Other, net (75,032) 277,924 Net cash (used in) provided by operating activities 88,201 (365,275)
Investing Activities Net sales (purchases) of investment securities (12,640)
Other 75,561 (365,275)
Net cash provided by (used in) investing activities Cash Flows from Non-Capital related Financing Activities 325,165 Proceeds from the issuance of bonds (9,599)
Bond issuance costs 315,566 Net cash provided by non-capital related financing activities Cash Flows from Capital and related Financing Activities (198,920) (120,467)
Capital and nuclear fuel expenditures . 442,475 Proceeds from notes receivable (184,460) (781,019)
Redemption of long-term debt (739)
Other (383,380) (459,750)
Net cash used in capital and related financing activities (67,285) (547,101)
Net decrease in cash and cash equivalents 165,135 712,236 Cash and cash equivalents at beginning of period $ 97,850 $ 165,135 Cash and cash equivalents at end of period
$ 346,708 S 303,007 Interest paid The accompanying notes are an integral part of these financial statements.
Long Island Power Authority and Subsidiaries 5 Consolidated Statements of Capitalization December 31, 2000 (Thousands of Dollars)
December 31, December 319 Interest Rate Series 2000 1999 Maturity Electric System General Revenue Bonds June 1,2005 to 2029 5.00% to 5.95% a 2000A S 337,235 S Capital Appreciation Bonds December 1,2000 to 2016 4.10% to 6.00% a 1998A 1,186,140 1,234,085 Serial Bonds December 1, 2018 to 2029 5.00% to 5.75% a 1998A 1,850,575 1,850,575 Term Bonds December 1, 2003 to 2028 4.40% to 5.30% a 1998A 165,607 157,662 Capital Appreciation Bonds April 1,2000 to 2016 4.00% to 5.25% a 1998B 1,176,640 1,256,655 Serial Bonds April 1,2018 4.75% a 1998B 57,145 57,145 Term Bonds Electric System Subordinated Revenue Bonds May 1,2033 4.85% b Series 1 250,000 250,000 May 1,2033 4.60% b Series 2 250,000 250,000 1, 2033 4.13% b Series 3 250,000 250,000 May May 1,2033 4.15% b Series 4 1250,000 250,000 1,2033 4.90% b Series 5 250,000 250,000 May May 1,2033 4.90% b Series 6 250,000 250,000 April 1,2025 4.21% b Series 7 250,000 250,000 April 1,2009 to 2012 4.00% to 5.00% a Series 8 218,300 218,300 6,741,642 6,524.422 Total General and Subordinated Revenue Bonds Debentures 7.30% a - 278 January 15, 2000 July 15, 2001 6.25% a - 8,460 March 15, 2003 7.05% a - 5,890 March 1,2004 7.00% a - 2.999 7.13% a - 14,307 June 1, 2005 November 1, 2022 9.00% a - 26,532 March 15, 2023 8,20% a 270,000 270.000 270,000 32S.466 Total Debentures NYSERDA Financing Notes March 1, 2016 5.15% a 1985 A,B 108,020 108,020 Pollution Control Revenue Bonds September 1,2019 7.15% a 1989 A,B 35,030 35,030 Electric Facilities Revenue Bonds June 1, 2020 7.15% a 1990 A 73,900 73,900 December 1, 2020 7.15% a 1991 A 26,560 26,560 February I, 2022 7.15% a 1992 A,B 13,455 13,455 August 1,2022 6.90% a 1992 C,D 28,060 28,060 November 1, 2023 5.30% a 1993 B 29,600 29.600 October I, 2024 5.30% a 1994 A 2,600 2,600 August 1, 2025 5.30% a 1995 A 15,200 15,200 332,425 332,425 Total NYSERDA Financing Notes (5,348) (8,759)
Unamortized premium and deferred amortization 7,338,719 7,176,554 Total Long-Term Debt 119,830 186,426 Less Current Maturities 7,218,889 6,990.128 Long-Term Debt (61,670) 58.70 (Accumulated Deficit)/Retained Earnings
$ 7,157,219 S 7,048,998 Total Capitalization a - Fixed rate b - Variable rate (rate presented is at December 31, 2000)
The accompanying notes are an integral part of these financial statements.
6 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Note 1. Basis of Presentation The Long Island Power Authority was established as a corporate municipal instrumentality of the State of New York, constituting a political subdivision of the State, created by Chapter 517 of the Laws of 1986 (the "Act"). As such, it is a component unit of the State and is included in the State's annual financial statements.
As used herein, the term "LILCO" refers to the Long Island Lighting Company, the publicly owned gas and electric utility company as it existed prior to the LIPA/LILCO Merger, as described in Note 2, and the term "LIPA" refers to that company as it exists after the LIPA/LILCO Merger, as a wholly-owned electric utility subsidiary company of the Long Island Power Authority (the "Authority"), doing business as LIPA. LIPA has I share of $1 par value common stock authorized, issued and outstanding, which is held by the Authority and eliminates in consolidation.
In October 1994, a not-for-profit subsidiary corporation, LIPA Resources, Inc. was formed under Section 402 of the Not-For-Profit Corporation Law. The subsidiary was formed for the purpose of marketing the Authority owned assets and providing consulting services by using the expertise developed by the Authority in decommissioning a fully licensed commercial nuclear plant. LIPA Resources, Inc. was inactive during the years ended December 31, 2000 and 1999 and had no assets or liabilities as of December 31, 2000 and 1999.
The Authority and its subsidiaries, LIPA and LIPA Resources, Inc. are referred to collectively, as the "Company."
Note 2. Merger/Change in Control/Nature of Operations Merger/Change in Control On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of the Authority, was merged with and into LILCO (the "Merger") pursuant to an Agreement and Plan of Merger dated as of June 26, 1997, by and among LILCO, MarketSpan Corporation (formerly known as BL Holding Corp., and currently known as KeySpan Energy, "KeySpan"), and the Authority, (the "Merger Agreement").
Pursuant to the Merger Agreement, immediately prior to the Merger, all of the assets and liabilities of LILCO related to the conduct of its gas distribution business and its non-nuclear electric generation business, and all common assets used by LILCO in the operation and management of its electric transmission and distribution business and its gas distribution business and/or its non-nuclear electric generation business (the "Transferred Assets") were sold to KeySpan.
As a result of the Merger, the Authority became the holder of I share of LILCO's common stock, representing 100% of the outstanding voting securities of LILCO. In addition, KeySpan issued promissory notes to LIPA of approximately $1.048 billion. The interest rate and timing of principal and interest payments on the promissory notes from KeySpan are identical to the terms of certain LILCO indebtedness assumed by LIPA in the Merger. KeySpan is required to make principal and interest payments to LIPA thirty days prior to the corresponding payment due dates, and LIPA then transfers those amounts to debtholders in accordance with the original debt repayment schedule.
7 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Authority from the proceeds of the The cash consideration required for the Merger was obtained by the 1998A and Electric System issuance and sale of its Electric System General Revenue Bonds, Series from the sale of the bonds were Subordinated Revenue Bonds, Series 1 through Series 6. The proceeds note of approximately $4.949 then transferred by the Authority to LIPA in exchange for a promissory of LILCO which effectively resulted in billion. As a result of the Merger, there was a change in control the creation of a new reporting entity, LIPA.
electric transmission and The assets and liabilities of LILCO acquired by LIPA consist of: (i) LILCO's Power Station, Unit 2 ("NMP2");
distribution system; (ii) its net investment in Nine Mile Point Nuclear its electric business, (iv) allocated accounts (iii) certain regulatory assets and liabilities associated with of its long-term debt.
receivable and other assets and liabilities; and (v) substantially all by the Authority's Board of Because of the manner in which LIPA's rates and charges are established and nuclear generation assets Trustees, the original net book value of the transmission and distribution The excess of the acquisition acquired in the Merger is considered to be the fair value of these assets.
recorded as an intangible asset titled costs over the fair value of the net assets acquired has been The acquisition adjustment arose "acquisition adjustment" and is being amortized over a 35 year period.
liabilities, totaling approximately principally through the elimination of LILCO's regulatory assets and
$2.4 billion. The balance of
$6.3 billion, and net deferred federal income tax liability of approximately 31, 2000 and 1999, the acquisition adjustment is approximately $3.6 billion and $3.8 billion at December respectively.
operations and management services Effective May 29, 1998, LIPA contracted with KeySpan to provide services agreement ("MSA").
for LIPA's transmission and distribution system through a management in turn, pays the salaries of their Therefore, LIPA pays KeySpan directly for services and KeySpan, management fee by the Authority to employees. LIPA has no employees; however, LIPA is charged a fossil fired generating plants of oversee LIPA's operations. LIPA contracts for capacity from the
("PSA"). Energy and fuel are KeySpan, formerly owned by LILCO, through a power supply agreement agreement ("EMA")
purchased by KeySpan on LIPA's behalf through an energy management (collectively; the "Operating Agreements").
York Counties of Nassau and The electric transmission and distribution system is located in the New County known as the Rockaways Suffolk (with certain limited exceptions) and a small portion of Queens approximately 50% of its
("Service Area"). For the year ended December 31, 2000, LIPA received and industrial customers, and the balance revenues from residential sales, 48% from sales to commercial from sales to other utilities and public authorities.
Nature of operations Agreements, LIPA, as owner of the transmission and distribution system and as party to the Operating is responsible for administering, conducts the electric business in the Service Area. The Authority Agreements.
monitoring and managing the performance by all parties to the Operating Agreement which describes the The Authority and LIPA are also parties to an Administrative Services services and other terms and conditions under which the Authority provides personnel, personnel-related services necessary for LIPA to provide electric service in the Service Area.
Long Island Power Authority and Subsidiaries 8 Notes to Consolidated Financial Statements charges LIPA a monthly As compensation to the Authority for the services described above, the Authority its obligations under the management fee equal to the costs incurred by the Authority in order to perform agreements described above.
Note 3. Summary of Significant Accounting Policies General Accounting Standards The Company complies with all applicable pronouncements of the Governmental and Financial Reporting for Board ("GASB"). In accordance with GASB Statement No. 20, "Accounting Accounting," the Proprietary Funds and Other Governmental Entities That Use Proprietary Fund to non-governmental entities Company also complies with all authoritative pronouncements applicable conflict with GASB (i.e., Financial Accounting Standards Board ("FASB") statements) that do not pronouncements.
Principles of Consolidation its subsidiaries. All The consolidated financial statements include the accounts of the Authority and significant intercompany balances and transactions have been eliminated in consolidation.
Accounting for the Effects of Rate Regulation to set rates for electric Under current New York law, the Authority's Board of Trustees is empowered of the New York service in LIPA's Service Area without being required by law to obtain the approval Public Service Commission ("PSC") or any other State regulatory body.
Standards ("SFAS") No.
The Company is subject to the provisions of Statement of Financial Accounting recognizes the economic 71, "Accounting for the Effects of Certain Types of Regulation." This statement benefits and obligations ability of regulators, through the ratemaking process, to create future economic future economic benefits affecting rate-regulated companies. Accordingly, the Company records these and obligations as regulatory assets and regulatory liabilities, respectively.
SFAS No. 71, it must continue to In order for a rate-regulated entity to continue to apply the provisions of provided to its customers meet the following three criteria: (1) the enterprise's rates for regulated services board empowered by a must be established by an independent third-party regulator or its own governing designed to recover the statute to establish rates that bind customers; (2) the regulated rates must be of the demand for the specific enterprise's costs of providing the regulated services; and (3) in view to assume that rates set at levels that will regulated services and the level of competition, it is reasonable recover the enterprise's costs can be charged to and collected from customers.
Based upon the Company's evaluation of the three criteria discussed above in relation to its operations, believes that SFAS No. 71 and the effect of competition on its ability to recover its costs, the Company continues to apply.
9 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements with previously incurred costs that are Regulatory assets represent probable future revenues associated probable future reductions in expected to be recovered from customers. Regulatory liabilities represent to customers through the ratemaking revenues associated with amounts that are expected to be refunded process.
of SFAS No. 71, at December 31, If the Company had been unable to continue to apply the provisions of regulatory assets would be considered 2000, the Company estimates that approximately $460.7 million
$3.6 billion would be considered for for write-off, and the acquisition adjustment, totaling approximately impairment.
Shoreham Settlement Agreement settlement regulatory asset on During 1999, the Company recorded a regulatory asset (Shoreham in connection with an agreement Statement of Financial Position) totaling approximately $234 million Central School District, Wading with Suffolk County, Town of Brookhaven, Shoreham-Wading River (which was succeeded by the North River Fire District and Shoreham-Wading River Library District and Nassau County, as discussed Shore Library District) (collectively, the "Suffolk Taxing Jurisdictions") 31, 2000 totaled asset at December in Note 11. The balance of the Shoreham settlement regulatory with carrying issued combined approximately $335 million as a result of additional credits and rebates charges earned on such credits and rebates.
Fuel and Purchased Power Cost Adjustment ("FPPCA")
Power Cost Adjustment LIPA's tariff includes a fuel recovery provision--the Fuel and Purchased from or return to customers any fuel costs
("FPPCA"). The FPPCA is designed to allow LIPA to recover The tolerance band cost tolerance band.
that fall outside an established base fuel and purchased power for the year ended December 31, 2000, increases in 1% percent increments annually. The tolerance band tolerance band for the power. The was 2% above and 2% below LIPA's base cost of fuel and purchased cost of fuel and purchased power.
year ended December 31, 1999, was 1%above or below the base the original base cost, Should fuel and purchased power costs increase in excess of 5% cumulatively over year forward, all costs may recover, from that as it did for the year ended December 31, 2000, the FPPCA 1, 2001, no tolerance band exists with in excess of the original base. Accordingly, effective January regard to fuel costs and all such excess costs are eligible for recovery.
power, totaling During the year ended December 31, 2000, LIPA incurred costs for fuel and purchasedband, and
$329 million in excess of the tolerance approximately $1.03 billion, or approximately for future recovery. However, LIPA's accordingly, such excess costs were deferred during the period excess to approximately $126 million over Board of Trustees approved a plan to limit the recovery of this limitation, additional fuel the 12 month period which began March 2001. As a result of this recovery expense totaling approximately $181 million was recognized in 2000.
approximately $307 million of Had the fuel and purchased power mechanism operated as designed, over recovery from 1998) would have excess fuel and purchased power costs (net of the $22 million remained deferred at year end.
10 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Utility Plant and Property and Equipment of utility Utility plant was stated at fair value at the date of the Merger. Additions to and replacements labor, indirect costs associated with an plant are capitalized at original cost, which includes material, The cost of renewals and addition or replacement, plus an allowance for funds used during construction.
property replaced, retired or betterments relating to units of property is added to utility plant. The cost of costs less otherwise disposed of is deducted from utility plant and, generally, together with dismantling is charged to any salvage, is charged to accumulated depreciation. The cost of repairs and minor renewals for on an average maintenance expense. Mass properties (such as poles, wire and meters) are accounted unit cost basis by year of installation.
and fixtures Property and equipment represents leasehold improvements, office equipment and furniture of the Authority.
Depreciation rates by groups The provisions for depreciation for utility plant result from the application of straight-line performed on of depreciable properties in service. The rates are determined by age-life studies plant costs was depreciable properties. The depreciation rate as a percentage of average depreciable approximately 2.9% in 2000 and 1999.
or the term of the Leasehold improvements are being amortized over the lesser of, the life of the assets is being depreciated over its estimated lease, using the straight-line method. Property and equipment useful life using the straight-line method.
Allowance for Borrowed Funds Used During Construction funds used for The allowance for funds used during construction ("AFC") is the net cost of borrowed cash income. AFC is computed monthly on a construction purposes. AFC is not an item of current years ended December 31, 2000 and 1999 portion of construction work in progress. The AFC rate for the was 4.76%.
Fuel Inventory by KeySpan located Effective July 2000, LIPA took title to all existing fuel oil in storage facilities owned represents the value of at generating stations on Long Island formerly owned by LILCO. Fuel inventory at each year-end in order to meet the low sulfur and internal combustion fuels that LIPA had on hand is valued using the weighted average demand requirements of these generating stations. Fuel inventory cost method.
Cash and Cash Equivalents and Investments guidelines Funds held by the Authority are administered in accordance with the Authority's investment These guidelines comply with pursuant to Section 2925 of the New York State Public Authorities Law.
investments and the New York State Comptroller's investment guidelines for public authorities. Certain to be used for cash and cash equivalents have been designated by the Authority's Board of Trustees expenditures, the issuance of credits in accordance with specific purposes, including debt service, capital Investments are reported at amortized the Shoreham Settlement Agreement, and clean energy initiatives.
cost which approximates fair market value.
11 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Deferred Charges Electric Deferred charges consists primarily of bond issue costs related to the issuance of the Authority's that are being amortized on a straight System General Revenue Bonds and Subordinated Revenue Bonds line basis over the life of the bonds.
Acquisition Adjustment assets The acquisition adjustment represents the difference between the purchase price paid and the net through rates on a straight line basis using a acquired from LILCO and is being amortized and recovered 35-year life.
LIPA generated sufficient cash flow to allow it to retire in the first quarter of 2000, before maturity, of 1998 approximately $58 million of Debentures and to retire during 1999 approximately $148.2 million Series A Bonds. The early retirement of debt reflects the advanced recovery of costs and as a result, million LIPA recorded accelerated amortization of the acquisition adjustment totaling approximately $34 and approximately $119 million in 2000 and 1999, respectively.
Fair Values of Financial Instruments and The Company's financial instruments approximate their fair market value at December 31, 2000, 1999. The fair values of the Company's long-term debt are based on quoted market prices.
Revenues and the accrual of Revenues are comprised of cycle billings rendered to customers, based on meter reads, electric revenues for services rendered to customers not billed at month-end.
Income Taxes and its The Authority is a political subdivision of the State of New York and, therefore, the Authority subsidiaries are exempt from Federal, state and local income taxes.
Payments-in-lieu-of-taxes The Company is required to make payments-in-lieu-of-taxes ("PILOTS") for all operating taxes previously paid by LILCO, including gross income, gross earnings, property, Metropolitan Transportation to Authority and certain taxes related to fuels used in utility operations. PILOTS also include payments municipalities and school districts in which the defunct Shoreham power plant is located. Shoreham which occurred related PILOTS paid in the first year following the Company's acquisition of Shoreham, been paid had on February 29, 1992, were equal to the taxes and assessments which would have Shoreham related Shoreham not been transferred to the Company. In each succeeding year through 2000, PILOTS have been reduced by ten percent of the first year's required payment.
Long Island Power Authority and Subsidiaries 12 Notes to Consolidated Financial Statements With the implementation of the Shoreham Settlement Agreement ("Settlement Agreement") discussed in Note 11, PILOTs obligations for the Shoreham plant have been, and will continue to be paid as follows:
Payment Date Dollars Period Covered 02/01/2000 $ 14,307,472 3/1/99-8/31/99 03/01/2000 12,268,000 9/1/99-2/28/00 09/01/2000 8,179,000 3/1/00-8/31/00 03/01/2001 8,179,000 9/1/00-2/28/01 09/01/2001 4,089,000 3/1/01-8/31/01 03/01/2002 4,089,000 9/1/01-2/28/02 Upon payment of the March 1, 2002 PILOTs, the Company will have satisfied all PILOT payments with respect to the Shoreham property.
Claims and Damages Losses arising from claims against LIPA, including workers' compensation claims, property damage, extraordinary storm costs and general liability claims, are partially self-insured. Reserves for these claims and damages are based on, among other things, experience and expected loss. Extraordinary storm losses incurred by LIPA are partially insured by various commercial insurance carriers. The insurance carriers provide partial insurance coverage for individual storm losses to the transmission and distribution system between $15 million and $25 million. Storm losses that are outside of this range are self-insured by LIPA. In certain instances, significant portions of extraordinary storm losses may be recoverable from the Federal Emergency Management Agency.
Use of Estimates The accompanying financial statements were prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain prior period amounts have been reclassified in the financial statements to conform with the current period presentation.
Recent Accounting Pronouncements Basic FinancialStatements-andManagement's Discussion andAnalysis-for State and Local Governments In June 1999, Governmental Accounting Standards Board issued GASB Statement No. 34, "Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments,"
which requires the basic financial statements to include management's discussion and analysis
("MD&A") and required supplementary information other than MD&A. The Company will adopt GASB Statement No. 34 for periods beginning after the fiscal year ended December 31, 2001. Adoption of GASB Statement No. 34 is not expected to have a material effect on the Company's financial statements.
13 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Derivative Instruments Hedging In June 1998, the FASB issued statement No. 133, "Accounting for Derivative Instruments and Activities" ("SFAS 133"), which was subsequently amended in June 2000 by FASB No. 138, statements "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These establish accounting and reporting requirements for derivative instruments and for hedging activities.
assets These standards require that an entity recognize the fair value of all derivative instruments as either or losses recognized in earnings. These or liabilities in the balance sheet with the offsetting gains provisions, until standards permit the deferral of hedge gains and losses, under specific hedge accounting certain derivative the hedged transaction is realized. These statements also provide an exception for that can be transactions that meet the criteria of "normal purchases and normal sales." Transactions other than a excepted from these statements are those that provide for the purchase or sale of something in quantities expected to be used or sold by the financial or derivative instrument that will be delivered reporting entity over a reasonable period in the normal course of business.
for the The Company implemented these statements on January 1, 2001. A contract review system is ongoing identification of derivative transactions (freestanding and embedded in host transactions) transactions currently being performed and the Authority believes that all contracts that contain derivative reviewed qualify for the "normal purchases and will be identified. The majority of the transactions for the purchase of electricity and petroleum normal sales" exception and include commodity transactions qualify for the exception are those and natural gas products. The derivative transactions that do not relating to the resulting from hedging activities consistent with the Company's risk management policy hedge instruments use of derivative instruments. In accordance with implementation requirements, open instruments for fuel were redesignated at January 1, 2001 for eligibility under hedge accounting. Hedge and losses will be procurement were not redesignated under these provisions because the related gains in its FPPCA and thus, deferrable under that included as part of LIPA's total commodity costs included a significant impact on the financial mechanism. The implementation of these statements will not have will be excluded position or results of operations of the Authority since the majority of its transactions under the "normal purchases and normal sales" exception.
PlantDecommissioning Liabilities Related In February 1996, the FASB issued an exposure draft entitled "Accounting for Certain nuclear power plant decommissioning.
to Closure and Removal of Long-Lived Assets," which includes Obligations On February 17, 2000, the FASB issued an exposure draft entitled "Accounting for proposed that Associated with the Retirement of Long-Lived Assets," to amend its initial draft and which June 15, 2001. A the exposure draft be effective for financial statements for fiscal years beginning after standard final statement is expected to be issued during the second quarter of 2001. If the accounting in higher annual provisions for removal or proposed in this exposure draft were adopted, it could result and other generating units and decommissioning to be recognized earlier in the operating life of nuclear to explore an accelerated recognition of the decommissioning obligation. The FASB is continuing issues, and the various issues associated with this project, including liability measurement and recognition The Authority resulting final pronouncement could be different from that proposed in the exposure draft.
accounting standard, assuming can make no prediction at this time as to the ultimate form of the proposed position or results it is adopted, nor can it make any prediction as to its ultimate effect(s) on the financial of operations of the Company.
Long Island Power Authority and Subsidiaries 14 Notes to Consolidated Financial Statements The Nuclear Regulatory Commission ("NRC") issued a policy statement on the Restructuring and Economic Deregulation of the Electric Utility Industry ("Policy Statement") in 1997. The Policy Statement addresses the NRC's concerns about the adequacy of decommissioning funds and about the potential impact on operational safety and reserves. It gives the NRC the right, in highly unusual situations where adequate protection of public health and safety would be compromised, to consider imposing joint and several liability on minority co-owners when one or more co-owners have defaulted on their contractual obligations. On January 5, 1999, the NRC commenced review of a petition for rulemaking filed by a group of utilities which are non-operating joint owners of nuclear plants. These utilities requested that the enforcement provisions of the NRC regulations be amended to clarify NRC policy regarding the potential liability of joint owners if other joint owners become financially incapable of bearing their share of the burden for safe operation or decommissioning of a nuclear power plant. On July 25, 2000, the NRC denied the petition and reaffirmed its position recognizing joint and several regulatory responsibility on co-owners. The Authority is unable to predict how this ruling may ultimately affect the results of operations or financial position.
Note 4. Rate Matters Under current New York law, the Authority is empowered to set rates for electric service in the Service Area without being required by law to obtain the approval of the PSC or any other state regulatory body.
However, the Authority has agreed, in connection with the approval of the Merger by the New York State Public Authorities Control Board (the "PACB"), that it will not impose any permanent increase, nor extend or re-establish any portion of a temporary rate increase, in average customer rates over a 12 month period in excess of 2.5% without approval of the PSC, following a full evidentiary hearing. Another of the PACB conditions requires that the Authority reduce average rates within LIPA's service area by no less than 14% over a ten year period commencing on the date when LIPA began providing electric service, when measured against LILCO's base rates in effect on July 16, 1997 (excluding the impact of proposed Shoreham tax settlement, but adjusted to reflect emergency conditions and extraordinary unforeseeable events.)
The Act requires that any bond resolution of the Authority contain a covenant that it will at all times maintain rates, fees or charges sufficient to pay the costs of operation and maintenance of facilities owned or operated by the Company; PILOTS; renewals, replacements and capital additions; the principal of and interest on any obligations issued pursuant to such resolution as the same become due and payable, and to establish or maintain any reserves or other funds or accounts required or established by or pursuant to the terms of such resolution.
LIPA's tariff includes the FPPCA to allow LIPA to adjust customers' bills to reflect significant changes in the cost of fuel and purchased power and related costs. For further discussion regarding the FPPCA, see Note 3.
LIPA's rates are largely based on LILCO's pre-Merger rate design to avoid customer confusion and facilitate an efficient transition from LILCO billing to LIPA billing. In addition, LIPA's tariff includes the FPPCA, a PILOTS recovery rider, a rider providing for the recovery of costs associated with the Shoreham tax settlement (credits and rebates) and a rider providing for the RICO Credits (credits to the bills of customers as a result of the settlement by LILCO of a RICO action in connection with the
Long Island Power Authority and Subsidiaries 15 Notes to Consolidated Financial Statements 2000.
construction and completion of nuclear generating facilities). RICO Credits expired in May that would The Act requires LIPA to make PILOTS for certain New York State and local revenue taxes adjustments otherwise have been imposed on LILCO. The PILOTS recovery rider allows for LIPA's rate to accommodate the PILOTS.
10 and 11.
For a further discussion on the Shoreharn tax settlement and Suffolk County matters see Notes Note 5. Utility Plant and Property and Equipment (in thousands)
December 31, 2000 1999 Utility Plant consists of:
$ 657,335 $ 659,591 Generation - nuclear 1,451,911 1,573,076 Transmission and distribution 4,096 2,929 Common 78,458 117,894 Construction work in progress 25,696 17,052 Nuclear fuel in process and in reactor 2,378,097 2,209,941 180,441 110,737 Less - Accumulated depreciation and amortization
$ 2,197,656 $ 2,099,204 Total Net Utility Plant Property and Equipment consists of:
Office equipment $ 870 $ 715 331 352 Leasehold improvements 377 354 Office furniture 1,599 1,400 657 358 Less - Accumulated depreciation and amortization
$ 942 $ 1,042 Total Net Property and Equipment
16 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Note 6. Nine Mile Point Nuclear Power Station, Unit 2 ("NMTP>2')
in Scriba, New As a result of the Merger, LIPA acquired an undivided 18% interest in NMP2, located
("NMPC"). The cotenants of NMP2 and York which is operated by Niagara Mohawk Power Corporation (41%), New York State their respective percentage ownership are as follows: LIPA (18%), NMPC
("RG&E") (14%)
Electric & Gas Corporation ("NYSEG") (18%), Rochester Gas Electric Corporation rated capability and Central Hudson Gas & Electric Corporation ("CHG&E") (9%). LIPA's share of the is approximately 205 megawatts ("MW"). LIPA's net utility plant investment, excluding nuclear fuel, was approximately $630 million and $650 million at December 31, 2000 and 1999, respectively.
proportions as Generation from NMP2 and operating expenses incurred by NMP2 are shared in the same of financing for any the cotenant's respective ownership interest. LIPA is required to provide its share on the basis of capital additions to NMP2. Nuclear fuel costs associated with NMP2 are being amortized the quantity of heat produced for the generation of electricity.
of spent NMPC has contracted with the United States Department of Energy ("DOE") for the disposal the contract at a rate of $1.00 nuclear fuel. LIPA reimburses NMPC for its 18% share of the cost under line losses. Such costs are per megawatt hour of net generation, less a factor to account for transmission included in the cost of fuel and purchased power.
Change of Ownership and Control in NMP2 In June 2000, all co-tenants except LIPA announced their intention to auction their interests 2000, Constellation Nuclear, L.L.C.
through an open, competitive bidding process. In December retain its
("Constellation Nuclear") was announced as the successful bidder. LIPA has elected to Regulatory ownership interest in NMP2. This transaction requires the approval of the Nuclear this transaction closes as Commission ("NRC"), Federal Energy Regulatory Commission, and the PSC. If will own the anticipated in July 2001, Constellation Nuclear will own 82% of NMP2 and the Company remaining balance of 18%.
Committee")
The NMP2 operating agreement establishes a management committee (the "Management completes it acquisition of comprised of one representative from each co-tenant. If Constellation Nuclear through its the non-LIPA shares of NMP2, it will control the decisions of the Management Committee with 82% ownership interest. LIPA, with the assistance of KeySpan, is currently in discussions issues: (i) the approval process for key decisions; (ii)
Constellation Nuclear regarding the following (iv) life extensions/capacity increases; (v) run/retire consolidation of committees; (iii) quorum provisions; (viii) payments for owners decisions; (vi) decommissioning plans; (vii) owner's representative on-site; (xii) that do not pay; (ix) audits; (x) Operating Agreement term; (xi) operation by third parties; MATS, who miscellaneous other provisions. LIPA employs an on-site nuclear oversight consultant, continues to carry out its responsibilities while the change in ownership proceeds. Once the new ownership structure is in place, the funding and role of MATS will be reevaluated.
Nuclear Plant Decommissioning study performed LIPA is making provisions for decommissioning costs for NMP2 based on a site specific for both the contaminated and non in 1995. LIPA's share of the total decommissioning costs a trust fund for its contaminated portions is estimated to be $145 million in 1996 dollars. LIPA maintains 31, 2000 share of the decommissioning costs of the contaminated portion of NMP2, which at December fund for its had an approximate value of $29.3 million. LIPA established a separate decommissioning
Long Island Power Authority and Subsidiaries 17 Notes to Consolidated Financial Statements share of the non-contaminated portion of NMP2 which had a value at December 31, 2000 totaling approximately $3.4 million. Through continued quarterly deposits and investments returns being maintained within these trusts, the Company believes that the value of these trusts will, in 2026, be sufficient to meet the Company's decommissioning obligations.
NMP2 Radioactive Waste NMPC has contracted with the U.S. Department of Energy ("DOE") for disposal of high-level radioactive waste ("spent fuel") from NMP2. Despite a court order reaffirming the DOE's obligation to accept spent nuclear fuel by January 31, 1998, the DOE has forecasted the start of operations of its high-level radioactive waste repository to be no earlier than 2010. LIPA has been advised by NMPC that the NMP2 spent fuel storage pool has a capacity for spent fuel that is adequate until 2012. If additional DOE schedule slippage should occur, the storage for NMP2 spent fuel, either at the plant or some alternative location, may be required.
Nuclear Plant Insurance NMPC procures public liability and property insurance for NMP2, and LIPA reimburses NMPC for its 18% share of those costs.
The Price-Anderson Amendments Act mandates that nuclear power generators secure financial protection in the event of a nuclear accident. This protection must consist of two levels. The primary level provides liability insurance coverage of $200 million (the maximum amount available) in the event of a nuclear accident. If claims exceed that amount, a second level of protection is provided through a retrospective assessment of all licensed operating reactors. Currently, this "secondary financial protection" subjects each of the 106 presently licensed nuclear reactors in the United States to a retrospective assessment of up to $88.1 million for each nuclear incident, payable at a rate not to exceed $10 million per year. LIPA's interest in NMP2 could expose it to a maximum potential loss of $15.9 million, per incident, through assessments of up to $1.8 million per year in the event of a serious nuclear accident at NMP2 or another licensed U.S. commercial nuclear reactor. These assessments are subject to periodic inflation indexing and to a 5% surcharge if funds prove insufficient to pay claims.
NMPC has also procured $500 million of primary nuclear property insurance and approximately $2.5 billion of additional protection (including decontamination costs) in excess of the primary layer through the Nuclear Electric Insurance Limited ("NEIL"). Each member of NEIL, including LIPA, is also subject to retrospective premium adjustments in the event losses exceed accumulated reserves. For its share of NMP2, LIPA could be assessed up to approximately $2.0 million per loss. This level of insurance is in excess of the NRC required minimum of $1.06 billion of coverage.
LIPA has obtained insurance coverage from NEIL for the extra expense incurred in purchasing replacement power during prolonged accidental outages. Under this program, should losses exceed the accumulated reserves of NEIL, each member, including LIPA, would be liable for its share of any such deficiency. LIPA's maximum liability per incident under the replacement power coverage, in the event of a deficiency, is approximately $700,000.
Long Island Power Authority and Subsidiaries 18 Notes to Consolidated Financial Statements Note 7. Investments and Cash and Cash Equivalents Funds of the Authority are administered in accordance with the Authority's investment guidelines pursuant to Section 2925 of the New York State Public Authorities Law. The Authority's investments may also be required to conform with additional restrictions contained in financing documents. The Authority is authorized to make investments in any of the following securities: (a) obligations of the U.S.
Treasury and U.S. Agencies; (b) obligations of any state or direct obligations of any state agency rated in one of the three highest rating categories by a rating agency; (c) bankers' acceptance or certificates of deposit issued by a commercial bank within the State having capital and surplus greater than $100 million; (d) commercial paper rated in one of the three highest rating categories for comparable types of obligations by a rating agency; (e) collateralized repurchase agreements; (f) investment agreements or guaranteed investment contracts with any financial institution who is rated in one of the three highest rating categories for comparable types of obligations by a rating agency; (g) money market funds rated in one of the three highest rating categories for comparable types of obligations by a rating agency; (h) municipal obligations rated in the highest rating category by a rating agency; and, (j) obligations of any person or entity rated in one of the three highest rating categories by a rating agency. The Authority's guidelines and any additional restrictions required by financing documents comply with the New York State Comptroller's investment guidelines for public authorities.
All investments of the Authority are held by designated custodians in the name of the Authority.
Investments are reported at amortized cost, which approximates fair market value at December 31, 2000 and 1999. Investments with original maturities of less than 90 days are classified as cash and cash equivalents. Certain cash and cash equivalents and investments have been designated by the Authority's Board of Trustees to be used for specific purposes such as capital additions, debt repayment, the funding of credits in accordance with the Shoreham Settlement Agreement and clean energy initiatives.
Governmental Accounting Standards Board, Statement No. 3 " Investments, Including Repurchase Agreements" ("GASB 3"), requires state and local governments to classify their investments in three defined categories of credit risk. Category I includes investments that are insured or registered, or securities that are held by the Company or its agent in the Company's name. Category II includes investments that are collateralized with securities which are held by the pledging financial institution's trust department or agent in the Company's name. Category III includes uncollateralized investments for which the securities are held by the broker's or dealer's trust department or agent in the Company's name.
Investments held by the Authority, with the exception of money market mutual funds, qualify as Category I investments at December 31, 2000 and 1999. Money market mutual funds qualify as Category III investments at December 3 1, 2000 and 1999, as they are neither collateralized nor insured. It is the Company's belief that despite a Category III classification, the money market mutual funds have a very low risk of default as institutions purchasing these items on the Authority's behalf are investing in U.S.
Government securities or commercial paper which meets Authority's minimum investment requirements, as described above.
The bank balances of approximately $2.3 million and approximately $1.2 million at December 31, 2000 and 1999, respectively, were collateralized for amounts above the Federal Depositors Income Company
("FDIC") limits with securities held by the custodian banks in the Authority's name.
Long Island Power Authority and Subsidiaries 19 Notes to Consolidated Financial Statements Investments and cash and cash equivalents of the Authority at December 31, 2000 and 1999, are detailed below:
(in thousands of dollars)
December 31, 2000 1999 Investments:
U.S. Government/Agencies $ - $ 15,512 Commercial Paper 102,105 340,263 Repurchase Agreement 174,969 Certificates of Deposit - 9,500 Total investments: 277,074 365,275 Cash and cash equivalents:
Commercial paper 50,179 12,435 Money market mutual funds 45,832 151,493 Demand deposits 1,839 1,207 Total cash and cash equivalents 97,850 165,135 Total investments and cash and cash equivalents $ 374,924 $ 530,410 Note 8. Debt The Authority The Authority financed the cost of the Merger and the refinancing of certain of the LILCO's outstanding debt by the issuance of approximately $6.73 billion aggregate principal amount of Electric System General Revenue Bonds and Electric System Subordinated Revenue Bonds (collectively, the "Bonds").
In accordance with the issuance of the Bonds, LIPA and the Authority entered into a Financing Agreement, whereby LIPA transferred to the Authority all of its right, title and interest in and to the revenues generated from the operation of the transmission and distribution system, including the right to collect and receive the same. In exchange for the transfer of these rights to the Authority, LIPA received the proceeds of the Bonds evidenced by a Promissory Note.
The Bonds are secured by a Trust Estate as pledged under the Authority's Bond Resolution (the "Resolution"). The Trust Estate consists principally of the revenues generated by the operation of LIPA's transmission and distribution system and have been pledged by LIPA to the Authority.
20 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Electric System General Revenue Bonds 2000 SriesA During the year ended December 31, 2000, the Authority issued Series 2000A Electric System General Revenue Bonds totaling approximately $325 million. These bonds were issued to fund certain rebates 11.
and credits in accordance with the Shoreham Settlement Agreement, as more fully discussed in Note in June These Bonds are comprised of tax-exempt Capital Appreciation Bonds with maturities beginning 2005 and continuing each year through 2029 and are not subject to optional redemption, mandatory sinking fund redemptions or any other redemption prior to maturity.
1998 Series A Bonds This Series is comprised of Current Interest and Capital Appreciation Bonds. The Current Interest year include: (i) tax exempt Serial Bonds with maturities that began in December 1999 and continue each Bonds with maturities beginning in December 2018 through December 2016; and (ii) tax exempt Term with and a final maturity in December 2029. The Capital Appreciation Bonds are tax exempt bonds 2028. During the year maturities beginning in December 2003 continuing each year through December ended December 31, 2000, the Company retired at maturity the 4.1% Serial Bonds totaling approximately with cash
$47.9 million. During the year ended December 31, 1999, the Company retired at maturity, Term from operations, the 4.5% Serial Bond totaling approximately $45.9 million and the 5.94% Taxable Bond of $25 million.
In November 1999, the Authority instituted a tender offer for the Electric System General Revenue December Bonds, Series 1998A maturing on December 1, 2018, 2022 and 2026. The offer expired in with cash 1999. The Authority purchased approximately $148.2 million par amount of the Bonds generated from operations as follows:
(In thousands, except price per bond)
Maturity Interest Acceptance Total Paid Rate Par Tendered Par Accepted Price Amount (December 1) 5.000% $102,450 $ 505 $ 89.000 $ 449 2018 5.125% 237,135 28,055 89.107 24,999 2022 5.250% 278,280 119.635 90.652 108,451 2026
$1_7865 $148.195 $133.899
$7.7 As a result of this tender, the Authority realized a gain on the early extinguishment of debt totaling item in million, net of the write-off of unamortized discount. This gain is shown as an extraordinary accordance with SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt ."
OptionalRedemption The 5.0% Serial Bonds due on December 1, 2014 ($39.4 million) and the Serial and Term Bonds maturing on or after December 1, 2015 (except the Term Bonds maturing on December 1, 2029), which the option total $207 million and $1.4 billion, respectively, are subject to redemption prior to maturity, at June 1, 2008 of the Authority, at a price of 101% of the principal amounts on any date beginning on through May 31, 2009, or at 100.5% beginning on June 1, 2009 through May 31, 2010 or at 100%
21 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements or in part from time to time, and in any order of beginning June 1, 2010 through maturity, in whole, on such principal amount redeemed is added to the maturity selected by the Authority. Interest accrued redemption price.
to
($587.2 million) are subject to redemption prior The Term Bonds maturing on December 1, 2029 to after June 1, 2003, in whole, or in part from time maturity, at the option of LIPA, on any date on and interest accrued on such amounts, together with the time, at a redemption price of 101% of the principal principal amount to the redemption date.
due on 1, 2013 ($883 million) and the 5.25% Serial Bonds The Serial Bonds maturing through December to redemption prior to maturity. In addition, the December 1, 2014, ($56.7 million) are not subject Bonds are not subject to redemption priorto maturity.
Capital Appreciation Bonds and the Taxable Term Sinking Fund in part, beginning on December 1, 2017 through Certain Term Bonds are subject to redemption, plus accrued interest at the redemption date, from December 1, 2029 at 100% of the principal amounts, to be made in amounts sufficient to redeem such mandatory sinking fund installments which are required Bonds.
19989&$1ig5 each maturities that began in April 2000 and continuing This Series is comprised of Serial Bonds with in April 2018.
year through April 2016 and Term Bonds maturing Company retired at maturity, with cash from operations, During the year ended December 31, 2000, the two Serial Bonds totaling approximately $80 million.
Optional Redemption to
($483.5 million) are subject to redemption prior Securities maturing on and after April 1, 2009 price of 101% of the principal amounts on any maturity, at the option of the Authority, at a redemption through 31, 2009, or at 100.5% beginning on April 1, 2009 date beginning on April 1, 2008 through May or in part from time to 2010 through maturity, in whole, May 31, 2010 or at 100% beginning April 1, on such principal amount the Authority. Interest accrued time, and in any order of maturity selected by redeemed is added to the redemption price.
Sinking Fund April 1, 2017 is subject to redemption, in part, beginning on The Term bond that matures on April 1, 2018 sinking interest to the redemption date, from mandatory at 100% of the principal amount, plus accrued Bonds.
in amounts sufficient to redeem such fund installments which are required to be made Electric System Subordinated Revenue Bonds Series I through and secured by the Trust Estate subject to and These Series are variable rate bonds payable from into General Revenue Bonds. These Bonds are classified subordinated to the Authority's Electric System applied the interest rate is re-determined, the interest rate various modes that determine the frequency that bonds, therefore, the 1 and 2 are currently Weekly Mode and the optional redemption features. Series
22 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Paper basis. Series 3 and 4 are currently Commercial applicable interest rate is re-determined on a weekly but not less frequently than as often as daily, Mode bonds, and as such, interest rates can be re-determined and as such the interest rate is re-determined Mode bonds, 270 days, and Series 5 and 6 are currently Daily daily.
In in interest rate modes, at the option of the Authority.
Provisions of the indenture allow for a change the option to adopt a modes, the Authority also has addition to the daily, weekly and commercial paper or annually) or a from daily to monthly, semi-annually Term mode, (thereby changing the reset period e.g.,
Fixed mode.
is I through 6 Bonds are supported by letters of credit which expire on May 25, 2001. The Authority Series of letter of credit providers for extension or replacement currently engaged in discussions with potential such letters of credit.
6 a Plan of Finance to restructure the Series 1 through In March 2001, the Board of Trustees approved that a lien bonds. This Plan of Finance anticipates Bonds, by refunding them with senior or subordinate be to be secured by letters of credit, a portion would portion of the Series 1 through 6 Bonds would continue be refunded with auction rate bonds.
refunded with fixed rate bonds, and a portion would these in the Weekly Mode. Principal and interest on This Series is comprised of variable rate bonds policy.
Bonds are secured by a financial guaranty insurance Agreement, to provide funds for the purchase of The Authority has executed a Standby Bond Purchase standby agreement expires in November 2008.
Series 7 Bonds tendered but not remarketed. The In interest rate modes, at the option of the Authority.
Provisions of the indenture allow for a change of adopt a modes, the Authority also has the option to addition to the daily, weekly and commercial paper or a from daily to monthly, semi-annually or annually)
Term mode, (thereby changing the reset period e.g.,
Fixed term mode.
Optional and Mandatory Redemption on their respective interest rate re-determination Series 1 through 6 and Series 7 Bonds are redeemable are redeemable at face value when they are in the dates at the option of the Authority. These bonds varying or Fixed rate mode bonds are redeemable at rates Weekly, Daily or Commercial Paper mode. Term Rate mode mode is greater than four years. Term or Fixed between 100% and 101% when the life of the is less than four years.
bonds are not redeemable if the life of the mode to mandatory redemptions from sinking Rinds such Series I through 6 and Series 7 Bonds are also subject dates. Sinking funds for Series I through 6 and that they will be redeemed by their respective maturity 2019, respectively.
Series 7 begin on December 1, 2030 and April 1, Interest Rate Swap Agreements interest agreements to reduce the impact of changes in The Authority has entered into interest rate swap outstanding having a interest rate swap agreements rates on the Series 7 Bonds. The Authority had two 2000 and 1999.
respectively at December 31, total notional amount of $150 million and $100 million,
Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements rate exposure on the Series 7 Bonds to a These agreements effectively change the Authority's interest are co-terminus with the Series 7 Bonds, with fixed rate of 4.2%. The interest rate swap agreements The Authority is exposed to credit loss in the optional earlier termination at the Authority's discretion.
rate swap agreements. However, the Authority event of nonperformance by the parties to the interest does not anticipate nonperformance by the counterparties.
Series 8 (Subseries A-H) as follows:
This Series is comprised of Current Interest Bonds issued Mandatory Interest Rate This Series is Purchase Principal to Mandatory Comprised Date Maturity Outstanding Purchase of (April 1) S(OOO) Date Subseries (April 1) 2001 2009 $ 27,300 4.00%
8A 2002 2009 27,300 4.00%
8B 2003 2010 27,300 4.00%
8C 2004 2010 27,300 4.50%
8D 2005 2011 27,300 4.50%
8E 2006 2011 27,300 5.00%
8F 2007 2012 27,300 5.00%
8G 2008 2012 27,200 5.00%
8H the Authority will determine to either purchase the Immediately prior to the mandatory purchase date, securities would then become due at the Subseries or have such Subseries remarketed. Remarketed the remarketing. Additionally, the original interest maturity date or such earlier date as determined by mandatory purchase date, at which time the interest rate on the debt issued will remain in effect until the at the time of remarketing if the Authority chooses rate will change in accordance with market conditions on the mandatory purchase date are secured by a to remarket. Principal, interest and purchase price planning to remarket the Subseries 8A that has a financial guaranty insurance policy. The Authority is such amount is not classified as current mandatory purchase date of April 1, 2001 and accordingly, maturities of long term debt.
redemption nor mandatory sinking fund redemption Each Subseries of Series 8 is not subject to optional prior to its mandatory purchase date.
LIPA consisted of $1.186 billion of General and The LILCO debt assumed by LIPA as part of the Merger, by LIPA immediately upon the closing of the Refunding Bonds, ("G&R Bonds"), that were defeased As exempt debt totaling approximately $915.7 million.
Merger, debentures totaling $2.27 billion, and tax obligated to Promissory Notes whereby KeySpan was part of the Merger, KeySpan and LIPA executed debt (the "Promissory Notes"). KeySpan is LIPA for approximately $1.048 billion of the assumed Promissory Notes 30 days in advance of the date required to pay LIPA principal and interest on the Promissory Notes between KeySpan and LIPA amounts are due to bond holders. The balance of the respectively.
totaled $602.4 million at December 31, 2000 and 1999,
24 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements The tax exempt debt assumed by LIPA were notes issued on behalf of LILCO by the New York State Research and Development Authority ("NYSERDA") to secure tax-exempt Industrial Development Revenue Bonds, Pollution Control Revenue Bonds ("PCRBs"), and Electric Facilities Revenue Bonds
("EFRBs") issued by NYSERDA.
Bond Defeasance/Refundings A portion of the proceeds of the Authority's Electric System General Revenue Bonds and Subordinated Bonds (which includes fixed and variable rate debt) were used in 1998 to refund all the G&R Bonds, certain Debentures and certain NYSERDA notes issued by LILCO that were assumed by LIPA as a result of the Merger. The purpose of these refundings was to achieve debt service savings.
General and Refunding Bonds On May 29, 1998, LIPA refunded all the G&R Bonds totaling $1.186 billion by depositing $1.190 billion in an irrevocable escrow deposit account to be invested in the direct obligations of the United States of America. The maturing principal of and interest on these obligations were sufficient to pay the principal and interest on the G&R Bonds, which were defeased on June 29, 1998. At December 31, 2000, approximately $1.130 billion of the G&R Bonds, outstanding are considered defeased.
The Authority will realize gross debt service savings from this refunding of approximately $588 million over the original life of the bonds. The refunding produced an economic gain (the present value of the debt service savings) of approximately $576 million.
Debentures In March 2000, LIPA deposited approximately $58 million, that it generated from operations, in an irrevocable escrow deposit account to be invested in direct obligations of the United States of America.
The Company has received certification from an independent verification agent that the maturing principal of and interest on these obligations will be sufficient to pay the principal and interest on the following debentures that LIPA assumed as part of the Merger, which includes the fair market value adjustment on the date of purchase (reflected at the Company's carrying value).
(In thousands)
Maturity Interest Rate Carrying Value 7/15/2001 6.250% $ 8,460 3/15/2003 7.050% 5,890 3/01/2004 7.000% 2,999 6/01/2005 7.125% 14,307 11/01/2022 9.000% 26,532 As a result of this defeasance, LIPA realized a gain on the early extinguishment of debt totaling approximately $1.7 million. This gain is shown as an extraordinary item in accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
NYSERDAs In October 1999, LIPA entered into an agreement with KeySpan, whereby KeySpan advanced approximately $47.2 million of its promissory note payable to LIPA, including interest, to be used to fund
25 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements
$26.4 the optional redemption at par of NYSERDA Bonds, 1976 Series A and 1979 Series B totaling million and $19.1 million, respectively. These Bonds were redeemed in December 1999.
During 1998, the Authority deposited $379 million in an irrevocable escrow deposit account to be interest invested in the direct obligations of the United States of America. The maturing principal of, and call premium on the on, such securities will be sufficient to pay the principal, interest and applicable
$50 following issues of NYSERDA Notes: approximately $11.9 million Series 1985A, approximately million Series 1989A, approximately $15 million Series 1989B, approximately $26 million Series 1990A, Series approximately $73 million Series 1991A, $50 million Series 1992A, approximately $36.5 million Series 1992D, (collectively, the 1992B, $50 million Series 1992C and approximately $22 million "Refunded NYSERDA Notes"). At December 31, 2000, the above mentioned outstanding Refunded NYSERDA Notes are considered defeased.
Notes are As a result of this refunding and the deposit with the Escrow Agent, the Refunded NYSERDA deemed to have been paid, and they cease to be a liability of LIPA. Accordingly, the Refunded NYSERDA Notes (and the related deposit with the Escrow Agent) are excluded from the Statement of Financial Position. The Authority will realize gross debt service savings from this refunding of (the approximately $287 million over the life of the bonds. The refunding produced an economic gain present value of the debt service savings) of approximately $66 million.
Deferred Amortization A debt refinancing charge of $61.9 million resulted from the refundings that the Authority has undertaken the amounts between May 28, 1998 and December 31, 2000, primarily because of the difference between the carrying amount of the paid for refundings, including amounts deposited with the Escrow Agent, and GASB No. 23, G&R Bonds, Debentures and NYSERDA Notes. In accordance with the provisions of deferred and shown in the Statement of Financial Position as Deferred approximately $61.9 million was of Amortization within long term debt and is being amortized, on a straight line method, over the shorter balance at December 31, 2000 and 1999 totaled the life of the new debt or the old debt. The unamortized
$37.2 and $48.5 million, respectively.
The Company Debt Maturity Schedule The total long-term debt maturing in each of the next five years ending December 31 is as follows: 2001,
$171.5
$119.8 million; 2002, $140.1 million; 2003, $147.2 million; 2004, $163.1 million; and 2005, million.
26 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Fair Values of Long - Term Debt and 1999 The carrying amounts and fair values of the Company's long-term debt at December 31, 2000 were as follows:
(In thousands oj dollars)
December 31, 2000 1999 Fair Value A $ 3,210,817 3,019,431 Electric System General Revenue Bonds, Series 1998 1,250,375 1,276,607 Electric System General Revenue Bonds, Series 1998 B 362,009 Electric System General Revenue Bonds, Series 2000 A 1,500,000 1,500,000 Electric System Subordinated Revenue Bonds, Series I through 6 250,000 250,000 Electric System Subordinated Revenue Bonds, Series 7 215,005 222,816 Electric System Subordinated Revenue Bonds, Series 8 (subseries A-H) 278,100 315,367 Debentures 324,874 334,189 NYSERDA Notes
$ 7,398,991 S 6,910,599 Total December 31, 2000 1999 CarryingAmount Series A $ 3,202,322 $ 3,242,322 Electric System General Revenue Bonds, 1998 1,233,785 1,313,800 Electric System General Revenue Bonds, 1998 Series B 337,235 Electric System General Revenue Bonds, 2000 Series A 1,500,000 1,500,000 Electric System Subordinated Revenue Bonds, Series 1 through 6 250,000 250,000 Electric System Subordinated Revenue Bonds, Series 7 218,300 218,300 Electric System Subordinated Revenue Bonds, Series 8 (subseries A-H) 270,000 328,466 Debentures 332,425 332,425 NYSERDA Notes
$ 7,344,067 $ 7,185,313 Total Debt Covenants Certain debt agreements require the maintenance by the Company of certain financial ratios and contain other restrictive covenants.
Note 9. Retirement Plans a cost The Authority participates in the New York State Employees' Retirement System, which is the sharing, multi-employer, public employee retirement system. The plan benefits are provided under by the State provisions of the New York State Retirement and Social Security Law which are guaranteed participate in Constitution and may be amended only by the State Legislation. The Authority's election to
27 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements available the plan is irrevocable. The New York State Employees' Retirement System issues a publicly and Local Retirement Systems, financial report. The report may be obtained from the New York State System is A.E. Smith State Office Building, Albany, New York 12244. The Employees' Retirement subdivided into the following four classes:
Tier I - members who last joined prior to July 1, 1973.
Tier II - members who last joined on or after July 1, 1973 and prior to July 27, 1976.
Tier III - members who last joined on or after July 27, 1976 and prior to September 1, 1983.
Tier IV - members who joined on or after September 1, 1983.
Tier I members are eligible for retirement at age 55. If members retire with 20 or more years of total If service, the service retirement benefit is 2% of the final average salary for each year of service.
1.66% of the final members retire with less than 20 years of total service, the service retirement benefit is allowance average salary for each year of service. Under this plan, the pension portion of retirement salary, unless the member's date of membership is cannot exceed 75% of the member's final average prior to April 1, 1970, then an alternative calculation is used.
years of service, and Tier II members are eligible to retire with full benefits at age 62 or at age 55 with 30 of service.
with reduced benefits for retirement between ages 55 and 62 with less than 30 years portion of the Retirement benefits are equivalent to Tier I members. Under this plan, the pension retirement allowance cannot exceed 75% of the member's final average salary.
to retire with Tier III members with 10 or more years of credited service after July 27, 1976 are eligible reduced benefits for full benefits between the ages of 55 and 62 with 30 years of service and with are integrated with Social retirement between ages 55 and 62 with less than 30 years of service. Benefits credited service, Security beginning at age 62. If members retire at age 62 and have 25 or more years of of final average salary for each year of service (not to exceed 30 the service retirement benefit will be 2%
30 years. If years), plus 1.5% of the final average salary for each year of credited service beyond service, the service retirement benefit will members retire at age 62 with fewer than 25 years of credited be 1.66% of the final average salary for each year of service.
benefits at age 62 Tier IV members with 5 or more years of credited service are eligible to retire with full with less or between the ages of 55 and 62 with 30 years or more of credited service. Tier IV members if they retire prior to age 62. Benefits are than 30 years of credited service will receive reduced benefits equivalent to Tier III members.
at age 55 or Retirement benefits vest after 5 years of credited service and are payable at various rates greater. The Employees' Retirement System also provides death and disability benefits.
Employees' Tier III and IV members are required by law to contribute 3% of their annual salary to the under certain conditions.
Retirement System and eligible Tier I and II members may make contributions to pay The Authority is required by the same statute to contribute the remaining amounts necessary benefits when due.
28 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements units and agencies which participate in the The State of New York and the various local governmental to determine the actuarial computed Retirement System are jointly represented, and it is not possible value of benefits for te Authority on a separate basis.
to the retirement plan were approximately The Authority's required contributions and payments made 31, 2000 and 1999 and the nine month
$82,000, $40,000, and $27,000 for the years ended December period ended December 31, 1998, respectively.
Note 10. Commitments and Contingencies Operating Lease office lease agreement for the period In December 1996, the Authority entered into a noncancelable the lease was amended to include additional January 1, 1997 through January 3 1, 2003. In January 2001, date was changed to January 31, 2011. The premises. As a result of the amendments, the lease expiration future minimum payments under the lease are as follows:
Year Ended December 31, (In thousands) 2001 $ 858 2002 1,160 1,202 2003 1,247 2004 1,294 2005 Thereafter 7,231
$ 12,992 U.S. Ltd. to construct and operate a The Company has also entered into a lease with TransEnergies for monthly lease payments from LIPA.
submarine cable from Connecticut to Long Island, in exchange megawatts of firm capacity is made Assuming an in-service date of May 2002, and assuming 300 lease payments as follows:
available, the Company would be obligated to make minimum (In thousands)
$ 19,350 May 2002 through April 2003 2004 19,350 2005 19,350 2006 19,350 2007 19,415 838,088 Thereafter through April 2022
$ 934,903
Long Island Power Authority and Subsidiaries 29 Notes to Consolidated Financial Statements must be obtained.
Before this agreement can become operative, federal and state regulatory approvals Legal Proceedings Shoreham Tax Matters River Central Through November 1992, Suffolk County, Town of Brookhaven, Shoreham-Wading District (which was School District, Wading River Fire District and Shoreham-Wading River Library Jurisdictions"), levied succeeded by the North Shore Library District)(collectively, the "Suffolk Taxing Authority acquired the and received real estate taxes from LILCO on the Shoreham plant. When the to the LIPA Act to make PILOTs on the Shoreham plant in February 1992, it was obligated pursuant between LILCO and the Shoreham plant beginning in December 1992. As part of the agreement to fund these payments.
Authority providing for the transfer of Shoreham to the Authority, LILCO agreed Authority. Both Prior to the Merger, LILCO charged rates sufficient to make these payments to the the plant was LILCO and the Authority contested the assessments on the Shoreham plant, claiming such PILOT payments, in whole or in part, pursuant to overassessed. Since 1992, the Authority has made Authority has been collecting the costs thereof interim PILOT agreements. Subsequent to the Merger, the pursuant to the PILOTs rider which is part of LIPA's rates.
York, Suffolk County, On March 26, 1997, ajudgment was entered in the Supreme Court, State of New to LILCO property on behalf of LILCO against the Suffolk Taxing Jurisdictions ordering them to refund tax overpayments (resulting from over-assessments of Shoreharn) in an amount exceeding $868 million, the judgment provides for the payment of including interest as of the date of the judgment. In addition, The Court also determined that the post-judgment interest (the "Shoreham Property Tax Litigation").
owned Shoreham. This Shoreham plant had a value of nearly zero during the period the Authority has New York on July 13, judgment was unanimously affirmed by the Appellate Division of the State of Jurisdictions sought leave from the Appellate Division to appeal this 1998. Certain of the Suffolk Taxing denied by the judgment to the New York State Court of Appeals. Their applications were unanimously were made to the Court of Appeals. On January Appellate Division. New applications for leave to appeal further review in the New York State 19, 1999, the Court of Appeals denied the motions. There is no court system.
entered into a Shoreham On January 11, 2000, the Authority, LIPA, and the Suffolk Taxing Jurisdictions amended Judgment was Settlement Agreement. Pursuant to the Shoreham Settlement Agreement, an to the greater of (i) $620 filed, reducing the amount of the Judgment and the Authority's PILOT claims Settlement Bonds paid with the surcharge or million, plus interest, less the principal of the Shoreham Tax and related obligations in (ii) the amount required to fully satisfy the Authority's remaining debt service is enforceable by the connection with the Shoreham Tax Settlement Bonds. The amended Judgment is Agreement Authority or LIPA in the event, among others, that any portion of the Shoreharn Settlement declared invalid or unenforceable.
the Supreme Court of the On September 15, 1998, Suffolk County filed an action against the Authority in tax refunds based State of New York, Suffolk County seeking to enjoin the Authority from recovering the Authority did not upon the over-assessment of the Shoreham nuclear plant. The action claimed that 1984-1985 have the right to recover property taxes previously assessed against LILCO for tax years Authority was not entitled to collect any through 1991-1992. On March 19, 1999, the Court ruled that the court stated that the refund of property taxes assessed against the Shoreham plant. In addition, the repayment of all or Authority had a duty to discontinue and abandon all proceedings which sought the
30 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements 15, part of the taxes assessed against the Shoreham plant. The Authority filed a notice of appeal on April 1999 and filed its brief on April 23, 1999. By Opinion & Order dated July 26, 1999, the Appellate any Division unanimously held that the Authority was not prohibited by the LIPA Act from enforcing attributable to overassessments part of the Shoreham tax certiorari judgment for real property tax refunds ruling confirmed on the Shoreham plant after the January 15, 1987 effective date of the LIPA Act. This in an amount the Authority's position that it is entitled to enforce the Shoreham property tax judgment which the Authority estimates is in excess of $800 million. By motion returnable September 24, 1999, alternative, for permission to appeal to Suffolk moved in the Appellate Division for reargument or, in the the Court of Appeals. The Authority filed papers in opposition to the motion. By order dated October 14, 1999, the Appellate Division denied the Suffolk motion. By motion returnable December 6, 1999, By Suffolk moved in the Court of Appeals for permission to appeal. The Authority opposed the motion.
order dated January 11, 2000, the Court of Appeals denied Suffolk's motion. Pursuant to the. Shoreham in Settlement Agreement, the Suffolk Taxing Jurisdictions discontinued this proceeding with prejudice May 2000. This proceeding is thus concluded.
On February 1, 1999, a lawsuit was filed in the Supreme Court of the State of New York, Nassau County, to by the Association for a Better Long Island against the Authority and LIPA seeking an order: (i) of the judgment obtained by the Authority in the require the Authority to collect the full amount offer of Shoreham Property Tax Litigation as well as certain overpaid PILOTs; and (ii) to declare that the void and legally unenforceable. The the Authority to settle the Shoreham Property Tax Litigation is was Authority answered the complaint on or about February 17, 2000. A Stipulation of Discontinuance signed by the parties and filed with the Court in January 2001. This proceeding is thus concluded.
the On March 23, 1999, the Shoreham Wading River Central School District filed an action against York, County of Nassau seeking an order directing Authority in the Supreme Court of the State of New were due and the Authority to pay approximately $6.4 million of PILOTs which the plaintiff alleged were the cumulative owing and approximately $24.6 million of PILOTs which the plaintiff alleged withdrew its deficiency as of June 1, 1998. By Stipulation dated August 19, 1999, the School District this petition. Pursuant to the Shoreham Settlement Agreement, the School District discontinued proceeding with prejudice in May 2000. This proceeding is thus concluded.
and the Supervisors In April 2000, an Article 78 proceeding was filed by the Town of Islip, its Supervisor jurisdictions and the County of of three other townships, against the Authority, LIPA, the Suffolk Taxing Nassau. The lawsuit seeks a judgment declaring illegal those provisions of the Shoreham Settlement of a surcharge Agreement providing for the repayment of certain tax certiorari judgments by imposition submitted its papers in opposition to the petition. A on electric rates. On August 18, 2000, the Authority hearing was held on October 5, 2000 in the Supreme Court, State of New York, Suffolk County.
Supplemental memoranda of law were submitted on October 19, 2000. In a decision dated December 5, on 2000, the Court held that to the extent the Shoreham Settlement Agreement imposes a surcharge County Tax electric rates on Suffolk County ratepayers, the Settlement Agreement violates the Suffolk of a tax Act. The Suffolk County Tax Act provides that Suffolk County shall pay the full amount and shall recover from such other judgment against Suffolk County and the other affected municipalities affected municipalities their share of the judgment. All defendants have filed notices of appeal.
Long Island Power Authority and Subsidiaries 31 Notes to Consolidated Financial Statements Merger Matters of LIPA was named as a defendant in an action brought by the County of Suffolk in the Supreme Court the State of New York, challenging the $67 million in compensation received by certain former LILCO officers in connection with the closing of the Brooklyn Union merger with LILCO and the Authority's acquisition of the common stock of LILCO. This action was voluntarily discontinued by plaintiffs without prejudice. The plaintiffs refiled their claims related to executive compensation in federal court, Island where they were consolidated with an existing action entitled The County of Suffolk. et al. v. Long Power Authority. et al., 98-5996 (TCP) (E.D.N.Y.), as set forth below.
the On September 28, 1998, Suffolk County and the Towns of Huntington and Babylon (collectively, "Plaintiffs") brought a class action on behalf of themselves and all electric utility ratepayers in Suffolk County (the "Ratepayers") against the Authority, LIPA, KeySpan and others in the United States District Court for the Eastern District of New York entitled County of Suffolk. et al. v. Long Island Power Authority. et al, (the "Huntington Lawsuit"). The Huntington Lawsuit alleged that (i) LIPA and the Authority failed to refund alleged capital gains directly to Ratepayers as a result of the Merger, and (ii) unlawfully depriving Ratepayers of their property under federal and state constitutional provisions books at the time of LIPA failed to refund to Ratepayers certain deferred tax reserves carried on LILCO's about the Merger, unjustly enriching KeySpan. An amended complaint was filed and served on or January 5, 1999. The Public Service Commission has since been discontinued from the litigation.
all Pursuant to the Shoreham Settlement Agreement, in May 2000, Suffolk discontinued its claims against filed motions to dismiss the complaint for failure defendants with prejudice. KeySpan and the Authority and to state a claim. On December 3, 1999, the court declined to consider KeySpan's motion to dismiss defendants moved for summary judgment on or about December 13, 1999. By order dated August 14, filed a 2000, the United States District Court granted the motions to dismiss the complaint. Plaintiffs Court motion to reargue, which was denied. Plaintiffs have prosecuted an appeal with the Second Circuit of Appeals.
Court In December 1997, Suffolk County brought a suit against the Authority and others in the Supreme of the State of New York seeking ajudgment, among other things: (i) annulling and vacating the approving acceptance by the Authority of certain conditions contained in the July 1997 PACB resolution taken the Authority's acquisition of LILCO and related transactions; (ii) declaring that all or any actions PACB conditions are (iii) directing null and void; and until such that by the Authority to implement or carry out the the stock or assets of LILCO unless and no further action to acquire the Authority take rendered in acquisition has been approved by the PACB in the manner approved by law. A decision was March 1998 which held for the Authority on all substantive issues. Suffolk County filed a notice of September 18, appeal to the Appellate Division of the State of New York, Second Department, and on Second 1998 filed its brief with that court. The Authority's brief was filed with the Appellate Division, to Department, on December 28, 1998. Suffolk County filed its reply brief on January 6, 1999. Pursuant with prejudice in May 2000. This the Shoreham Settlement Agreement, this proceeding was discontinued proceeding is thus concluded.
33 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements Superfund Sites. Under Section 107(a) of the federal Comprehensive Environmental Response, Legislation"),
Compensation and Liability Act ("CERCLA", also commonly referred to as the "Superfundincurred by the are liable for costs parties who generated or arranged for disposal of hazardous substances or threat of release of the hazardous Environmental Protection Agency ("EPA") in responding to a release substances.
("ROD"), in connection with the Metal Bank. In December 1997, the EPA issued its Record of Decision and operated by Metal Bank remediation of a licensed disposal site located in Philadelphia, Pennsylvania, cost of the selected remedy for the site of America. In the ROD, the EPA estimated that the present worth order to 13 Potential is $17.3 million. In June 1998, the EPA issued a unilateral administrative and for remedial action at the site.
Responsible Parties ("PRPs"), including LIPA, for the remedial design the selected remedy, who will implement LIPA can not predict with reasonable certainty the actual cost of agreement, LIPA is responsible for the remedy, or the cost, if any, to LIPA. Under a PRP participation has recorded a liability of $1.6 7.95% of the costs associated with implementing the remedy. LIPA this site.
million representing its estimated share of the additional cost to remediate sites in Kansas City, Kansas and PCB Treatment Inc. LILCO has also been named a PRP for disposal PCB Treatment, Inc. from 1982 Kansas City, Missouri. The two sites were used by a company named oils and other materials until 1987 for the storage, processing, and treatment of electric equipment, EPA, the buildings and certain soil containing Polychlorinated Biphenyls ("PCBs"). According to the of the PRPs, including LILCO and areas outside the buildings are contaminated with PCBs. Certain have developed a work plan for several other utilities, formed a group, signed a consent order, and LILCO with documents indicating investigating environmental conditions at the site. The EPA provided were shipped to this site. LIPA is that LILCO was responsible for less than 1% of the materials that sites.
currently unable to determine its share of the cost to remediate these Through The PSA Environmental Matters Which May Be Recoverable From LIPA By KeySpan filed a lawsuit against LILCO in the Asharoken. In March 1996, the Village of Asharoken (the "Village")
of Asharoken, New York, et al. v. Long New York Supreme Court, Suffolk County (IncorporatedVillage and injunctive relief based upon Island Lighting Company). The Village is seeking monetary damages with the LILCO design and theories of negligence, gross negligence and nuisance in connection alleges upset the littoral drift, thereby construction of the Northport Power Plant which the Village to dismiss the lawsuit, causing beach erosion. In November 1996, the court decided LILCO's motion damages on the surviving dismissing two of the three causes of action. The court limited monetary action. The liability, if any, continuous nuisance claim to three years prior to the commencement of the However, LIPA does not believe that this resulting from this proceeding cannot yet be determined.
position, cash flows or results of operations.
proceeding will have a material adverse effect on its financial LIPA Could Have Responsibility Environmental Matters Which Are Currently Untraceable For Which LILCO and nine other PRPs by the Other Superfund Sites. In connection with a lawsuit filed against costs for a federal Superfund Town of Oyster Bay for indemnification for remediation and investigation reached and approved by the Court in March site in Syosset, New York, a settlement agreement has been cash flows or financial position, 2000. The settlement did not have a material adverse effect on LIPA's results of operations. This matter is thus concluded.
34 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements the State of New York that it may be In addition, LILCO was notified by the Attorney General of of hazardous substances that may have responsible for the disposal of wastes and/or for the generation conducted a search of its corporate records been disposed of at the Blydenburgh Superfund site. LILCO associated with this landfill. The and did not locate any documents concerning waste disposal practices with LILCO in 1998, which expired on Attorney General has not renewed the tolling agreement executed in connection with this site since March 18, 1999 nor has LIPA been involved with any PRP activity 1999.
program, that LIPA may be DEC has notified LILCO, pursuant to the New York State superfund Northport Site, a municipal responsible for the disposal of hazardous substances at the Huntington/East this site is $19.1 million. LILCO records landfill property. The estimated response cost for remediating of any substances, do not reflect any evidence to suggest it may have been responsible for disposing if any, of the costs to unable to determine its share, hazardous or otherwise, at this site. LIPA is currently investigate and remediate this site.
the disposal of a hazardous substance at the The EPA notified LILCO that LIPA may be responsible for Remediation efforts are being pursued by Port Washington Landfill, another municipal landfill property.
The cleanup cost for this site is estimated at the EPA and the Attorney General of the State of New York.
of costs to investigate and remediate this
$45 million. LIPA is currently unable to determine its share General to allow for further site. LIPA has entered into a tolling agreement with the Attorney investigation regarding this matter.
Other iMatters numerous Independent Power Producers As a result of the Merger, LIPA has assumed contracts with for electric generating capacity. Under the terms
("IPPs") and the New York Power Authority ("NYPA")
LIPA may purchase up to 100% of the of the agreement with NYPA, which will expire in May 2014, LIPA's service territory at Holtsville, New electric energy produced at the NYPA facility located within debt service payments and to make fixed York. LIPA is required to reimburse NYPA for the minimum the plant.
non-energy payments associated with operating and maintaining is obligated to purchase all the energy they With respect to contracts entered into with the IPPs, LIPA market prices. However, LIPA has no make available to LIPA at prices that often exceed current of the table below, LIPA has assumed obligation to the IPPs it they fail to deliver energy. For purposes anything less than full performance by full performance by the IPPs, as no event has occurred to suggest dates through 2022.
these parties. The contracts with the IPPs expire on various
("wheeling") capacity in connection LIPA had also assumed a contract with NYPA for firm transmission benefit of LIPA. With the inception of the with a transmission cable that was constructed, in part, for the 18, 1999, this contract was provided with New York Independent System Operator ("ISO") on November "grandfathered rights" status. Grandfathered rights allow the contract parties to continue business as transmission service continues. LIPA was usual under the ISO. That is, the concept of firm physical for this existing transmission agreement provided with the opportunity to convert its grandfathered rights TCCs provide an alternative to physical
("ETA") into Transmission Congestion Contracts ("TCCs").
from point A to point B prior to the ISO.
transmission reservations, which were required to move energy A to point B without a transmission Under the rules of the ISO, energy can be moved from point to pay a tolling fee to the owner of the reservation however, the entity moving such energy is required
Long Island Power Authority and Subsidiaries 35 Notes to Consolidated Financial Statements ISO.
TCC. This tolling fee is called transmission congestion and is set by the into TCCs, LIPA will continue to pay all transmission Although LIPA has elected to convert its ETAs LIPA has the potential to receive added revenues charges per the ETA, which expires in 2020. In return, with the TCCs are considered from congestion charges. All such charges and revenue associated in the FPPCA calculation.
components of or reductions to fuel costs, and as such are included power contracts:
The following table represents LIPA's commitments under purchased (In millions of dollars)
NYPA Holtsville Firm Total Debt Other Fixed Energy* Transmission IPPs* Business*
Service Charges For the years ended
$ 19.162 $ 21.840 $ 138.500 S 216.164 2001 $ 21.873 $ 14.789 15.961 19.250 141.300 213.530 2002 21.960 15.059 14.832 19.250 143.600 215.129 2003 22.050 15.397 12.271 19.250 126.000 195.360 2004 22.146 15.693 12.391 19.250 113.400 183.204 2005 22.246 15.917 428.748 401.500 766.300 1,913.358 Subsequent thereto 171.497 145.313 503.365 500.340 1,429.100 2,936.745 Total 281.772 222.168 372.138 239.974 391.400 1,156.350 Less: Imputed Interest 82.962 69.876 S 131.227 $ 260.366 $ 1,037.700 $ 1,780.395
$ 198.810 S 152.292
- Assumes full performance by the IPPs and NYPA.
Note 11. Regulatory Asset Shoreham Settlement Agreement an agreement with the Suffolk Taxing As discussed in Note 10, in January 2000, the Authority reached the Shoreham Nuclear Power Station.
Jurisdictions and Nassau County regarding the over assessment of of rebates and credits to Under the terms of the agreement, the Authority is to issue $457.5 million non Suffolk County customers customers over a five-year period which began May 29, 1998. In addition, rebates and credits, received additional rebates totaling approximately $25 million. In order to fund such 1998A in May System General Revenue Bonds, Series the Authority issued $142.5 million of Electric Revenue Bonds, Series 2000A in 1998 and issued approximately $325 million of Electric System General bills will include a surcharge (the 2000. Beginning in June 2003, LIPA's Suffolk County customers' period to repay the Authority for the Suffolk Surcharge) to be collected over the succeeding 25 year of the credits, principal on the Bonds plus interest, and administrative fees associated with the issuance rebates and related financing,
36 Long Island Power Authority and Subsidiaries Notes to Consolidated Financial Statements such costs identified above, LIPA As future rates will be established at a level sufficient to recover all
$335 million in accordance has, at December 31, 2000, recorded a regulatory asset totaling approximately R.-gulation." This $335 million is with SFAS No. 71, "Accounting for the Effects of Certain Types of rebates and credits to customers and comprised of costs recorded from 1998 through 2000 which include dates that the rebates and credits costs of administering the program and interest incurred between the were issued and December 31, 2000.
to customer rebates, have been As indicated above, the costs incurred during 1998, which were charged in the Statement of Revenues, recorded as a regulatory asset in 1999, with a corresponding offset Deficit) entitled rebates recoverable. In Expenses, and Changes in Retained Earnings/(Accumulated for Regulatory Assets" (EITF accordance with Emerging Issues Task Force Issue No. 93-4 "Accounting asset can be capitalized as a regulatory 93-4), costs incurred that did not previously qualify as a regulatory are met. As the requirements of asset in a subsequent period (i.e. 1999), when the capitalization criteria which took place subsequent to year SFAS No. 71 were met upon completing the Settlement Agreement, has reflected the effects of the end but prior to the issuance of the financial statements, the Company Settlement in its 1999 financial statements.
asset during the period.
Costs incurred during 1999 and 2000 were capitalized as a regulatory Settlement were incurred, but as future In addition to the items described above, other costs related to the to meet the capitalization criteria of rates will not be established at levels to recover such costs, they fail to Nassau County to fund the Clean SFAS No. 71. These costs include $25 million to be contributed Energy initiative.
Other Financial Information PRJCEWATERHOUSEGOPERS PricewaterhouseCoopers LLP 401 Broad Hollow Road Melville NY 11747 Telephone (631) 753 2700 Facsimile (631) 753 2800 Report of Independent Accountants on Other Financial Information To the Board of Trustees of the Long Island Power Authority and Subsidiaries Long Island Power Authority Our report on the audit of the consolidated financial statements of the 31, 2000, and for the year then and its subsidiaries, (collectively, the "Company") as of December an opinion on the consolidated financial ended. This audit was conducted for the purpose of forming accompanying the statements taken as a whole. The supplementary consolidating information of the consolidated financial consolidated financial statements is not necessary for fair presentation of revenues, expenses and position and of capitalization, and the related consolidated statements of the Company in conformity with changes in retained earnings/(accumulated deficit), and cash flows The supplementary accounting principles generally accepted in the United States of America.
and is not a required part of the information is presented only for purposes of additional analysis information has been subjected to consolidated financial statements. The supplementary consolidating statements and, in our the auditing procedures applied in the audit of the consolidated financial consolidated financial statements opinion, is fairly stated, in all material respects, in relation to the taken as a whole.
March 22, 2001 37
38 Long Island Power Authority and Subsidiaries Consolidated Statement of Financial Position December 31, 2000 (Thousands of Dollars)
LIPA Authority Eliminations Consolidated Assets S 2,197,656 $ $ S 2,197,656 Utility Plant, net
- 942 942 Property and Equipment, net Current Assets 97,850 97,850 Cash and cash equivalents 288,593 (11,519) 277,074 Investments Accounts receivable (less allowance for doubtful 208,644 208,623 21 accounts of S21,480) 1,754 1,754 Interest receivable 119,830 (119,830)
Due from LIPA - 50,251 50,251 Fuel inventory 324 2,085 1,761 Prepayments and other current assets 508.372 (131,349) 637,658 260,635 Total Current Assets 602,427 602,427 Promissory Note Receivable - KeySpan (785.056)
,785056 Note Receivable - LIPA 11,519 (11,519)
Designated Funds - 32,789 32,789 Nonutility Property and Other Investments 67,198 67,198 Deferred Charges (5,549,213)
- 5,549,213 Due from LIPA Regulatory Assets - 335,061 335,061 Shoreham settlement 125,600 125,600 Fuel and purchased power cost recoverable 460,661 460,661 Total Regulatory Assets (75,469) 75,469 Investment in Subsidiary Acquisition Adjustment (net of accumulated 3,643,342 - 3,643,342 amortization of S452,169) S 7,253,189 S 6,768,114 S (6,378,630) S 7,642,673 Total Assets Capitalization S 6,653,668 S - S 7,218,889 S 565,221 Long-term debt - (785,056) 785,056 Note payable to the Authority - (5,549,213) 5,549,213 Due to the Authority 6,653,668 (6,334,269) 7,218,889 6,899,490 (75,469) (61,670) 75,469 (61,670)
Retained earnings 6,591,998 (6,258,800) 7,157,219 6,824,021 Total Capitalization Current Liabilities - 119,830 119,330 Current maturities of long-term debt 119,830 - (119,830)
Current maturities of note payable to the Authority 86,412 86,412 Due to KeySpan 71,213 18,334 89,547 Accounts payable and accrued expenses 29,163 - 29,'63 Accrued taxes 13,973 37,952 51,925 Accrued interest 24.550 24,550 Customer deposits 345,141 176,116 (119,830) 401,427 Total Current Liabilities 60,955 - 60,955 Deferred Credits 23,072 23,072 Claims and Damages Commitments and Contingencies 7,253,189 S 6,768,114 S (6,378,630) S 7,642,673 S
Total Capitalization and Liabilities
39 Long Island Power Authority and Subsidiaries Consolidated Statement of Revenues, Expenses, and Changes in Retained Earningsl(Accumulated Deficit)
For the Year Ended December 31, 2000 (Thousands of Dollars)
LIPA Authority Eliminations Consolidated
$2,199,741 $ - $ $2,199,741 Electric Revenue Expenses 883,673 883,673 638,627 Operations - fuel and purchased power 638,627 27,882 (28,181) 33,162 Operations and maintenance 33,461 299 208,295 General and administrative 207,996 34,209 Depreciation and amortization 34,209 230,319 Capital recovery amortization 230,319 28,181 (28,181) 2,028,285 Payment in lieu of taxes 2,028,285 Total Operating Expenses Excess of operating revenues over expenses 171,456 (28,181) 28,181 171,456 (expenses over revenues)
Other income and (deductions), net - (136,070) 136,070 (303,778) 31,713 Investment of Subsidiary 4,927 330,564 28,181 (28,181) 1 Investment income .-
Management fee 18,031 392 18,423 Other 22,958 223,067 (195,889) 50,136 Total other income and (deductions), net Excess of revenues over expenses before 194,414 194,886 (167,708) 221,592 interest charges and extraordinary gain Interest charges and (credits) 321,384 322,095 711 - (303,778)
Interest on long-term debt, net 303,778 (5,958) 27,371 Interest on note payable to the Authority 33,329 Other interest Allowance for borrowed funds used during (5,646) - (5,646) construction 332,172 315,426 (303,778) 343,820 Total interest charges Excess of expenses over revenues before (137,758) (120,540) 136,070 (122,228) extraordinary gain 1,688 1,688 Gain on early extinguishment of debt (136,070) (120,540) 136,070 (120,540)
Excess of expenses over revenues Retained earnings/(Accumulated deficit) 60,601 58,870 (60,601) 58,870 Beginning $ (61,670) 475,469 S (61,670)
S (75,469)
Ending
40 Long Island Power Authority and Subsidiaries Consolidated Statement of Cash Flows For the Year Ended December 31, 2000 (Thousands of Dollars)
LIPA Authority Eliminations Consolidated Operating Activities S (136,070) S (120,540) $ 136,070 $ (120,540)
Net excess of (expenses over revenues) revenues over expenses Adjustments to reconcile excess of (expenses over revenues)
(1,688) revenues over expenses to net cash provided by operating activities (1,688) 208,295 Gain on early extinguishment of debt 207,996 299 Depreciation and amortization 34,209 34,209 Capital recovery amortization (91,830)
(91,830)
Shoreham credits 12,095 30,067 17,972 Amortization of cost of issuing and redeeming securities 136,070 (136,070)
(280)
Gain on investment in subsidiary (280)
Other Changes in operating assets and liabilities (8,088) (21) - (8,109)
Accounts receivable, net (1,425) - - (1,425)
Fuel inventory (147,613) (147,613)
Fuel and purchased power costs recoverable (payable) (39,236) 7,443 - (31,793)
Accounts payable and accrued expenses 39,619 38 - 39,657 Due to KeySpan (12,972) - (12,972)
Accrued taxes (1,262) (1,496) - (2.758)
Accrued interest 33,484 (1,736) - 31,748 Other, net (107,184) 32.152 - (75,032)
Net cash (used in) provided by operating activities Investing Activities - 75,414 12,787 88,201 Purchase of investment securities, net of sales (12,640) - - (12,640)
Other (12,640) 75,414 12,787 75,561 Net cash (used in) provided by investing activities Cash Flows from Non-Capital related Financing Activities 325,165 - 325,165 Proceeds from issuance of long-term debt (9,599) - (9,599)
Bond issuance costs (9,599) 325.165 - 315,566 Net cash provided by provided by non-capital related financing activities Cash Flows from Capital and related Financing Activities (198,721) (199) (198,920)
Capital and nuclear fuel expenditures 2,549,817 (2,549,817)
Proceeds (issuance) of note payable to the Authority (2,177,960) 2,177,960 Payment of note payable to the Authority (56,500) (127,960) - (184,460)
Redemption of long-term debt 116,636 (500,016) (383,380)
Net cash provided by (used in) capital and related financing activities (12,787) (67,285) 12,787 (67,285)
Net decrease in cash and cash equivalents and designated funds 1,268 165,135 (1,268) 165,135 Cash and cash equivalents and designated funds at beginning of period $ (11,519) S 97,850 $ 11,519 $ 97,850 Cash and cash equivalents and designated funds at end of period
$ 32,778 S 313,930 S 346.708 Interest paid
41 Long Island Power Authority and Subsidiaries Consolidated Statement of Capitalization December 31, 2000 (Thousands of Dollars)
Series LIPA Authority Eliminations Consolidated Maturity Interest Rate Electric System General Revenue Bonds June 1,2005 to 2029 5.00% to 5.95% a 2000A S 337,235 $ $ 337,235 1,186,140 Capital Appreciation Bonds 4.10% to 6.00% a 1998A 1,186,140 Dece mber 1,2001 to 2016 1,850,575 Serial Bonds 5.00% to 5.75% a 1998A 1,850,575 Decc mber 1,2018 to 2029 165,607 Term Bonds 4.40% to 5.30% a 1998A 165,607 Dececmber 1,2003 to 2028 1,176,640 Capital Appreciation Bonds to 5.25% a 1998B 1,176,640 April 1, 2001 to 2016 4.00% 57,145 Serial Bonds 4.75% a 1998B 57,145 April 1,2018 Term Bonds Electric System 250,000 Series 1 250,000 May 1,2033 4.85% b 250,000 Subordinated Revenue Bonds 4.60% b Series 2 - 250,000 May 1,2033 250,000 250,000 4.13% b Series 3 -
May 1,2033 250,000 b Series 4 - 250,000 May 1,2033 4.15%
- 250,000 250,000 May 1,2033 4.90% b Series 5 250,000 250,000 4.90% b Series 6 -
May 1,2033
- 250,000 250,000 April 1,2025 4,21% b Series 7 4.00% to 5.00% b Series 8 - 218,300 218,300 April 1, 2009 to 2012 Total General and - 6,741,642 6,741,642 Subordinated Revenue Bonds Debentures 270,000 - 270,000 March 15, 2023 8.20% a - 270,000 270,000 Total Debentures NYSERDA Financing Notes Pollution Control Revenue Bonds 5.15% a 1985A,B 108,020 March 1,2016 108,020 Electric Facilities Revenue Bonds 35,030 - 35,030 September 1,2019 7.15% a 1989A,B 7.15% a 1990A 73,900 - 73,900 June 1,2020 a 1991A 26,560 - 26,560 December 1, 2020 7.15%
7.15% a 1992A,B 13,455 1-3,455 February 1,2022 6.90% a 1992C,D 28,060 - 28,060 August 1, 2022 5.30% a 1993B 29,600 - 29,600 November 1, 2023 5.30% a 1994A 2,600 2,600 October 1, 2024 5.30% a 1995A 15,200 15,200 August 1,2025 332,425 332,425 Total NYSERDA Financing Notes Unamortized premium (37,204) 31,856 (5,348) and deferred amortization 565,221 6,773,498 - 7,338,719 Subtotal 904,886 - (904,886)
Note Payable to the Authority 5,549,214 (5,549,214)
Due to the Authority 7,019,321 6,773,498 (6,454,100) 7,338,719 Total 119,830 119,830 (119,830) 119,830 Less Current Maturities 6,899,491 6,653,668 (6,334,270) 7,218,889 Total Long-Term Debt (75,469) (61,670) 75,469 (61,670)
Retained earnings/(Accumulated deficit) T$ T 9 , 9 " ( 6 25 ,T 1 $ 7,157,219 I3, Total Capitalization a - Fixed rate b - Variable rate (rate presented is at December 31, 2000)
1111 PRICEWATERHOUSECCOPERS U PricewaterhouseCoopers LLP 401 Broad Hollow Road Melville NY 11747 Telephone (631) 753 2700 Facsimile (631) 753 2800 Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with GovernmentAuditing Standards To the Board of Trustees of the Long Island Power Authority and Subsidiaries We have audited the consolidated financial statements of the Long Island Power Authority and its subsidiaries (collectively, the "Company") as of December 31, 2000 and 1999, and have. issued our report thereon dated March 22, 2001. We conducted our audits in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States.
Compliance As part of obtaining reasonable assurance about whether the Company's consolidated financial provisions statements are free of material misstatement, we performed tests of compliance with certain of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts.
However, providing an opinion on compliance with those provisions was not an objective of our audits of and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances noncompliance that are required to be reported under Government Auditing Standards.
Internal Control Over Financial Reoorting In planning and performing our audits, we considered the Company's internal control over financial reporting to determine our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses.
A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the design of internal control over financial reporting or its operation that we consider to be material weaknesses.
This report is intended solely for the information and use of the Company and is not intended to be and should not be used by anyone other than the specified party.
March 22, 2001 42