Moody's Investors Service believes that the restoration costs from the aftermath of Storm Sandy could further weaken the Long Island Power Authority's (LIPA: A3, negative) financial condition particularly if liquidity measures are not strengthened and rate recovery, disaster relief and insurance compensation payments are not received in a timely manner.

Based on conversations with LIPA management, the utility has about $500 million of cash on hand, but cash liquidity will be reduced by an estimated $250 million following the debt service payment expected to be made on December 1st. LIPA does not have a debt service reserve fund in its indenture -- a credit weakness noted in Moody's assignment of the A3 rating.

Substantial storm-related costs will be an additional call on liquidity but Moody's anticipates that the major cash outflows will not occur for a few months until after contractors complete their respective audit and billing process. In the meantime, LIPA has indicated that the authority is close to establishing new credit lines in the amount of $300 to $500 million, which will bolster liquidity. It remains unclear whether LIPA will need to further increase the size of the facilities in light of final Storm Sandy costs.

Additionally, LIPA still has not received the full $100 million reimbursement it is expecting from the Federal Emergency Management Agency (FEMA) for storm-related damages resulting from Irene last year.

The year long delay in the reimbursement process is primarily based upon disputes over costs. Governor Cuomo has indicated that New York will ask for 100% reimbursement from FEMA of storm-related costs but how quickly these funds are received remains an uncertainty, particularly given the outstanding claims for Irene.

An additional vulnerability for LIPA is the degree to which their storm-responsiveness affects their ability to recover storm related costs. As an unregulated utility, LIPA's board can quickly establish a rate mechanism, which can strengthen the utility's current financial position. However, implementing the rate mechanism may be a challenge if storm responsiveness turns out to be a major political issue.

Already,Governor Cuomo, in a November 1st letter to all New York utilities and in numerous media statements, has indicated the state would invoke punitive measures on any utility if storm-responsiveness becomes an issue and in the case of LIPA, would, in the extreme, seek to remove the management responsible for such results, should they occur.

On the positive side, we understand that LIPA's power supply sources were not heavily impacted including the underwater transmission lines that bring energy on to the island. Most of the damage occurred within the distribution network. The greatest damage was to the Rockaways and Long Beach distribution systems, which were significantly destroyed by the storm. These affected customers however represent about 3% of LIPA customer revenues.

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