OFFERING MEMORANDUM BOOK ENTRY ONLY POWER AUTHORITY OF THE STATE OF NEW YORK SERIES 1

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1 OFFERING MEMORANDUM BOOK ENTRY ONLY POWER AUTHORITY OF THE STATE OF NEW YORK SERIES 1 $400,000,000 3(a)(2) (Federally Tax-Exempt) Commercial Paper Program SERIES 2 $450,000,000 3(a)(2) (Federally Tax-Exempt) Commercial Paper Program SERIES 3 $350,000,000 3(a)(2) (Federally Taxable) Commercial Paper Program Ratings A-1/P-1/F-1+ February 27, 2012

2 POWER AUTHORITY OF THE STATE OF NEW YORK 30 South Pearl Street Albany, New York THE AUTHORITY The Power Authority of the State of New York (the "Authority") is a corporate municipal instrumentality and political subdivision of the State of New York (the "State") created in 1931 by Title 1 of Article 5 of the Public Authorities Law, Chapter 43-A of the Consolidated Laws of the State, as amended (the "Act"), to help provide a continuous and adequate supply of dependable electric power and energy to the people of the State. The Authority generates, transmits and sells electric power and energy, principally at wholesale, as permitted or required by applicable law. The Authority currently owns and operates in New York five major generating facilities, five small hydroelectric facilities, and eleven small electric generating units, with a total installed capacity of approximately 6,051 megawatts ( MW ), and a number of transmission lines, including major 765-kV and 345-kV transmission facilities. The Authority's generating facilities are as follows: the St. Lawrence-Franklin D. Roosevelt Power Project ( St. Lawrence-FDR ), in St. Lawrence County; the Niagara Power Project ( Niagara ), in Niagara County; the Blenheim-Gilboa Pumped Storage Power Project ( Blenheim-Gilboa ), in Schoharie County; the combined-cycle electric generating plant in New York City (the 500- MW plant ); the Richard M. Flynn Plant, in Suffolk County; and eleven small, clean power plants ( SCPPs ), with one of these plants located on Long Island, New York, and the remainder in New York City. The small hydroelectric facilities are the Ashokan Project, in Ulster County; the Kensico Project, in Westchester County; the Gregory B. Jarvis Plant, in Oneida County; the Crescent Plant, in Albany and Saratoga Counties; and the Vischer Ferry Plant, in Saratoga and Schenectady Counties. The Authority's primary customers are municipal and investor-owned utilities and rural electric cooperatives located throughout New York, high load factor industries and other businesses, various public corporations located within the metropolitan area of New York City, including The City of New York, and certain out-of-state customers. The Authority acts through a Board of Trustees consisting of the following individuals: Michael J. Townsend, Chairman; Jonathan F. Foster, Vice Chairman; D. Patrick Curley; John S. Dyson; R. Wayne Le Chase; the Honorable Eugene L. Nicandri; and Mark O Luck. Gil C. Quiniones is the Authority s President and Chief Executive Officer. 1

3 Source and Priority of Payment THE COMMERCIAL PAPER PROGRAM The Commercial Paper Program is authorized pursuant to the Act and the Resolution Authorizing Commercial Paper Notes adopted by the Authority on June 28, 1994, as amended and restated on November 25, 1997, and as subsequently amended and supplemented (as amended, supplemented, and restated, the "Resolution"). The Resolution authorizes the issuance of general obligation notes known as "Power Authority Commercial Paper Notes", which are authorized to be issued as separate series of Commercial Paper Notes from time to time in accordance with the provisions of the Resolution. Currently, three series of Commercial Paper Notes, designated as Series 1, Series 2, and Series 3 (the Notes ), have been authorized and are outstanding (a fourth series, Series 4 Notes, is authorized, but no Series 4 Notes are currently outstanding). Series 1 and Series 2 consist of Notes the interest on which is excluded from gross income for Federal income tax purposes ( Tax-Exempt Notes ) and Series 3 consists of Notes the interest on which is not excluded from gross income for Federal income tax purposes (the Taxable Notes ). The interest on all Notes is exempt from personal income taxes imposed by the State of New York or any political subdivision thereof (including The City of New York), except estate or gift taxes and taxes on transfers (see the section herein entitled Tax Matters ). The Resolution authorizes the issuance of Series 1 Notes up to a maximum amount of $400 million, Series 2 Notes up to a maximum amount of $450 million, Series 3 Notes up to a maximum amount of $350 million, and Series 4 Notes up to a maximum amount of $220 million. As of December 31, 2011, the Authority had outstanding $373,666,000 of Series 1 Notes, $81,815,000 of Series 2 Notes, and $44,093,000 of Series 3 Notes. At December 31, 2012, it is anticipated that the Authority will have outstanding approximately $321,932,000 of Series 1 Notes, $150,388,000 of Series 2 Notes, and $38,766,000 of Series 3 Notes which reflects issuance, retirement, and refunding of Notes during On February 24, 1998, the Authority adopted its General Resolution Authorizing Revenue Obligations and since that date has adopted nine resolutions supplemental and amendatory thereto (collectively, and as amended and supplemented, the Bond Resolution ). The Notes are payable from the Trust Estate (as defined in the Bond Resolution), which includes, subject to certain limited exceptions, all revenues derived directly or indirectly from any of the Authority s operations. The Notes have a lien on the Trust Estate junior and inferior to the lien of the Obligations (as defined in the Bond Resolution) and Parity Debt (as defined in the Bond Resolution) and on a parity with the lien of Subordinated Contract Obligations (as defined in the Bond Resolution) and Subordinated Indebtedness (as defined in the Bond Resolution). Obligations include the Series 2002 A Revenue Bonds, the Series 2003 A Revenue Bonds, the Series 2006 A Revenue Bonds, the Series 2007 A, 2007 B, and 2007 C Revenue Bonds, and the Series 2011 A Revenue Bonds (collectively, the Revenue Bonds ), and other debt issued on a parity therewith pursuant to the Bond Resolution. Parity Debt includes the ART Notes, as defined below, any note issued pursuant to the bank liquidity agreement relating to the ART Notes, certain scheduled payments to be made by the Authority under several swap agreements entered into by the Authority in connection with the issuance of the Revenue Bonds and other bond issues, and other debt issued in the future on a parity therewith. Subordinated Contract Obligations and Subordinated Indebtedness include the Notes, the Authority s Extendible 2

4 Municipal Commercial Paper Notes ( EMCP Notes ), and any notes issued pursuant to the bank liquidity agreement relating to the Notes. See the sections below entitled Liquidity Support and DEBT STRUCTURE. See also The Niagara Project License under the heading Current Issues and Developments for a discussion of payments constituting a Subordinated Contract Obligation. The Authority has a number of contracts which obligate the Authority to make payments constituting Operating Expenses (as defined in the Bond Resolution) prior to Obligations, Parity Debt, Subordinated Contract Obligations and Subordinated Indebtedness. The Authority may enter into additional such contracts without restriction as to amount and without having to satisfy any debt service coverage or historical or projected earnings test. The Authority may also issue additional Subordinated Indebtedness or incur Subordinated Contract Obligations for any purpose of the Authority authorized by state law, without restriction as to amount and without having to satisfy any debt service coverage or historical or projected earnings test. All such Subordinated Indebtedness or Subordinated Contract Obligations will be payable from revenues derived directly or indirectly from any of the Authority s operations subject and subordinate to the payments to be made with respect to senior indebtedness, and secured by a lien on and a pledge of the Trust Estate junior and inferior to the lien on and pledge of such revenues for the payment of the senior indebtedness. Under the Bond Resolution, revenues of the Authority which are available to pay Subordinated Contract Obligations and Subordinated Indebtedness will be applied on a parity basis as between Subordinated Contract Obligations and Subordinated Indebtedness. The full faith and credit of the Authority are pledged for the payment of the Notes in accordance with the terms and provisions of the Resolution. The Notes will not constitute a pledge of the faith and credit of the State or of any political subdivision thereof, other than the Authority. The Authority has no taxing power, and the issuance of the Notes will not obligate the State or any of its political subdivisions to levy or pledge the receipts from any form of taxation for the payment of the Notes. Purpose Series 1 Notes The proceeds of the Series 1 Notes have been and will continue to be used primarily to finance the Authority's current and future energy services programs. In addition, the proceeds of the Series 1 Notes may be used for the refunding of any Series 1 Notes, the payment of any Series 1 Notes at their maturity, the payment of any Series 2, Series 3, or Series 4 Notes, the repayment of any amounts outstanding under the Revolving Credit Agreement (as defined in the section herein entitled Liquidity Support ), to refund or redeem the EMCP Notes, to pay any costs incurred in connection with the issuance of the Notes, and any other purposes approved in accordance with the Resolution. The Authority's energy services program includes, among other things, comprehensive energy services programs designed to improve energy efficiency and energy conservation for the Authority s southeastern New York ( SENY ) public customers, State 3

5 entities in other parts of the State, public school districts or boards and community colleges located throughout the State, and county and municipal government facilities. Series 2 Notes The proceeds of the Series 2 Notes, together with other monies available therefor, were used to refund approximately $311 million in principal amount of the Authority s general purpose bonds that were issued under the predecessor to the Authority s current Bond Resolution. Series 2 Notes proceeds have also been used to finance costs associated with (1) the SCPPs, (2) the 500- MW plant, and (3) costs associated with the installation of eight fuel cell electric generating units owned by the Authority located at New York City wastewater treatment plants. Series 2 Notes proceeds have been also used to finance costs associated with the relicensing and upgrade of the Niagara Project and to refund Subordinate Revenue Bonds. In addition, Series 2 Notes proceeds have been and/or may be used to refund the Authority s Series 1998B Revenue Bonds, any Series 2 Notes, to pay any Series 2 Notes at their maturity, to pay any Series 1, Series 3, or Series 4 Notes, to repay any amounts outstanding under the Revolving Credit Agreement (as defined in the section herein entitled Liquidity Support ), to refund or redeem EMCP Notes, to finance projects under the Authority s current and future energy services program, and for any other purposes approved in accordance with the Resolution. Series 3 Notes The proceeds of the Series 3 Notes, together with other monies available therefor, were used to refund approximately $291 million in principal amount of the Authority s general purpose bonds that were issued under the predecessor to the Authority s current Bond Resolution. Series 3 Notes proceeds have been used to refund certain of the Authority s Series 1998B Revenue Bonds and may be used to refund any Series 3 or Series 4 Notes and to pay any Series 1, Series 2, Series 3, or Series 4 Notes. In addition, the Series 3 Notes proceeds have been used and may in the future be used (1) to finance any costs associated with the relicensing and the upgrade of the Niagara Project, (2) to finance the relicensing of the Authority s St. Lawrence-FDR Project, costs related to compliance with the 2003 St. Lawrence-FDR Project license, and costs related to settlement agreements entered into by the Authority in connection with the relicensing process, (3) to finance the Authority s St. Lawrence-FDR Project Modernization Program, (4) to finance costs related to the Tri-Lakes Transmission Project, and (5) to finance projects under the Authority s current and future energy services program. Legislation enacted into law in September 2009 authorized most of the Authority s commercial and industrial customers to participate in the Authority s energy services program. The Series 3 Notes proceeds may also be used to finance costs associated with the 500-MW plant, to repay any amounts outstanding under the Revolving Credit Agreement (as defined in the section herein entitled Liquidity Support ), to finance costs associated with the SCPPs, to finance costs associated with the Authority s Landfill Gas Power Generation program, to refund or redeem EMCP Notes, to pay any costs of issuance of any Notes, to provide funds for the Other Post-Employment Benefits ( OPEB ) trust established by the Authority, and for any other purposes approved in accordance with the Resolution. 4

6 The Notes The Notes are issuable only in book-entry form, in denominations of $100,000 and integral multiples of $1,000 in excess thereof (see the section herein entitled "Book-Entry-Only System"). The Notes will mature no later than 270 days from the dates of issue, but not later than two business days prior to the termination date of the Revolving Credit Agreement or any other revolving credit agreement providing liquidity support for the Notes (see the section herein entitled Liquidity Support ). The Series 1 Notes and the Series 2 Notes shall bear interest payable at maturity, calculated on the basis of a 365 or 366 day year for the actual days elapsed. The Series 3 Notes may be issued and sold at a discount or at par. Interest, if any, payable on the Series 3 Notes shall accrue from their respective dates, payable at maturity and calculated on the basis of a 360-day year. The Notes shall be payable at maturity at the office of the Issuing and Paying Agent for the Notes. The Bank of New York Mellon is the Issuing and Paying Agent for the Notes under an Issuing and Paying Agency Agreement. Book-Entry-Only System The Notes will be issued as registered Notes and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), New York, New York, which will act as securities depository for the Notes. Individual purchases will be made in bookentry-only form, in the principal amount of $100,000 or integral multiples of $1,000 in excess thereof. Purchasers will not receive certificates representing their interest in the Notes purchased. So long as DTC is the registered owner of the Notes, payments of the principal of, and interest on, the Notes will be made directly to DTC. Disbursement of such payments to DTC participants and indirect participants is the responsibility of DTC, and disbursement of such payments to the beneficial owners is the responsibility of direct and indirect participants. Purchasers are directed to DTC and its participants for a description of DTC s practices and procedures. DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to the Authority or the Issuing and Paying Agent. Under such circumstances and in the event that a successor securities depository is not obtained, Note certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Note certificates will be printed and delivered. NEITHER THE AUTHORITY, THE ISSUING AND PAYING AGENT, NOR ANY DEALER OF THE NOTES WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO PARTICIPANTS, TO INDIRECT PARTICIPANTS OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (I) SENDING TRANSACTION STATEMENTS; (II) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (III) THE PAYMENT OR TIMELINESS OF PAYMENT BY DTC OR ANY 5

7 PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OF, OR INTEREST ON, THE NOTES; (IV) ANY NOTICE WHICH IS PERMITTED OR REQUIRED TO BE GIVEN TO NOTE HOLDERS; OR (V) ANY CONSENT GIVEN BY DTC OR OTHER ACTION TAKEN BY DTC AS NOTE HOLDER. Tax Matters Tax-Exempt Notes. In the opinion of Hawkins Delafield & Wood LLP, New York, New York, Bond Counsel to the Authority ("Bond Counsel") rendered January 14, 2011, under existing statutes and court decisions and assuming continuing compliance with certain tax covenants described herein, (i) interest on the Tax-Exempt Notes is excluded from gross income for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) interest on the Tax-Exempt Notes is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under the Code; such interest, however, is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative minimum tax imposed on such corporations. In rendering its opinion, Bond Counsel has relied on certain representations, certifications of facts, and statements of reasonable expectations made by the Authority in connection with the Tax- Exempt Notes, and Bond Counsel has assumed compliance by the Authority with certain ongoing covenants to comply with applicable requirements of the Code to assure the exclusion of interest on the Tax-Exempt Notes from gross income under Section 103 of the Code. In addition, in the opinion of Bond Counsel, under existing statutes, interest on the Tax-Exempt Notes is exempt from personal income taxes imposed by the State of New York or any political subdivision thereof (including The City of New York). Bond Counsel expresses no opinion regarding any other Federal or state tax consequences with respect to the Tax-Exempt Notes. Bond Counsel renders its opinion under existing statutes and court decisions as of the date of such opinion, and assumes no obligation to update its opinion after the date hereof to reflect any future action, fact or circumstance or change in law or interpretation, or otherwise. Bond Counsel expresses no opinion on the effect of any action hereafter taken or not taken in reliance upon an opinion of other counsel on the exclusion from gross income for Federal income tax purposes of interest on the Tax-Exempt Notes, or under state and local tax law. Certain Ongoing Federal Tax Requirements and Covenants. The Code establishes certain ongoing requirements that must be met subsequent to the issuance and delivery of the Tax- Exempt Notes in order that interest on the Tax-Exempt Notes be and remain excluded from gross income under Section 103 of the Code. These requirements include, but are not limited to, requirements relating to use and expenditure of gross proceeds of the Tax-Exempt Notes, yield and other restrictions on investments of gross proceeds, and the arbitrage rebate requirement that certain excess earnings on gross proceeds be rebated to the Federal government. Noncompliance with such requirements may cause interest on the Tax-Exempt Notes to become included in gross income for Federal income tax purposes retroactive to their issue date, irrespective of the date on which such noncompliance occurs or is discovered. The Authority has covenanted to comply 6

8 with certain applicable requirements of the Code to assure the exclusion of interest on the Tax- Exempt Notes from gross income under Section 103 of the Code. Certain Collateral Federal Tax Consequences. The following is a brief discussion of certain collateral Federal income tax matters with respect to the Tax-Exempt Notes. It does not purport to address all aspects of Federal taxation that may be relevant to a particular owner of a Tax- Exempt Note. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the Tax-Exempt Notes. Prospective owners of the Tax-Exempt Notes should be aware that the ownership of such obligations may result in collateral Federal income tax consequences to various categories of persons, such as corporations (including S corporations and foreign corporations), financial institutions, property and casualty and life insurance companies, individual recipients of Social Security and railroad retirement benefits, individuals otherwise eligible for the earned income tax credit, and taxpayers deemed to have incurred or continued indebtedness to purchase or carry obligations the interest on which is excluded from gross income for Federal income tax purposes. Interest on the Tax-Exempt Notes may be taken into account in determining the tax liability of foreign corporations subject to the branch profits tax imposed by Section 884 of the Code. Information Reporting and Backup Withholding. Information reporting requirements apply to interest paid on tax-exempt obligations, including the Tax-Exempt Notes. In general, such requirements are satisfied if the interest recipient completes, and provides the payor with, a Form W-9, Request for Taxpayer Identification Number and Certification, or if the recipient is one of a limited class of exempt recipients. A recipient not otherwise exempt from information reporting who fails to satisfy the information reporting requirements will be subject to "backup withholding", which means that the payor is required to deduct and withhold a tax from the interest payment, calculated in the manner set forth in the Code. For the foregoing purpose, a "payor" generally refers to the person or entity from whom a recipient receives its payments of interest or who collects such payments on behalf of the recipient. If an owner purchasing a Tax-Exempt Note through a brokerage account has executed a Form W-9 in connection with the establishment of such account, as generally can be expected, no backup withholding should occur. In any event, backup withholding does not affect the excludability of the interest on the Tax-Exempt Notes from gross income for Federal income tax purposes. Any amounts withheld pursuant to backup withholding would be allowed as a refund or a credit against the owner's Federal income tax once the required information is furnished to the Internal Revenue Service. Miscellaneous. Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the debt obligations of the Authority, including the Tax-Exempt Notes, under Federal or state law and could affect the market price or marketability of such debt obligations. Prospective purchasers of the Tax-Exempt Notes should consult their own tax advisors regarding the foregoing matters. 7

9 Taxable Notes. Under the Code, interest on the Taxable Notes is included in gross income for Federal income tax purposes. However, in the opinion of Bond Counsel to the Authority, under existing statutes, interest on the Taxable Notes is exempt from personal income taxes imposed by the State of New York or any political subdivision thereof (including The City of New York). The following discussion is a brief summary of the principal United States Federal income tax consequences of the acquisition, ownership and disposition of Taxable Notes by original purchasers of the Taxable Notes who are U.S. Holders, as defined herein. This summary (i) is based on the Code, Treasury Regulations, revenue rulings and court decisions, all as currently in effect and all subject to change at any time, possibly with retroactive effect; (ii) assumes that the Taxable Notes will be held as capital assets ; and (iii) does not discuss all of the United States Federal income tax consequences that may be relevant to a holder in light of its particular circumstances or to holders subject to special rules, such as insurance companies, financial institutions, tax-exempt organizations, dealers in securities or foreign currencies, persons holding the Taxable Notes as a position in a hedge or straddle, or holders whose functional currency (as defined in Section 985 of the Code) is not the United States dollar, or holders who acquire Taxable Notes in the secondary market. Holders of Taxable Notes should consult with their own tax advisors concerning the United States Federal income tax and other consequences with respect to the acquisition, ownership and disposition of the Taxable Notes as well as any tax consequences that may arise under the laws of any state, local or foreign tax jurisdiction. Characterization as Short-Term Obligations. Each Taxable Note is a Short-Term Obligation for Federal income tax purposes and, as such, is subject to special rules contained in Sections 1281 through 1283 if the holder is an accrual method taxpayer, bank, regulated investment company, common trust fund or among certain types of pass-through entities, or if the Taxable Note is held primarily for sale to customers, is identified under Section 1256(e)(2) as part of a hedging transaction, or is a stripped bond or coupon and held by the person responsible for the underlying stripping transaction. In any such instance, interest on, and acquisition discount with respect to, the Taxable Note accrues on a ratable (straight-line) basis, subject to further special elections to accrue such interest and acquisition discount, if any, on a constant yield basis using a constant interest rate and daily compounding. For purposes of the preceding sentence, the term acquisition discount means the excess of the stated redemption price of a Taxable Note which is payable at maturity over the holder s tax basis therefor. A holder of a Taxable Note not described in the preceding paragraph, including a cash method taxpayer, must report interest income in accordance with the holder s regular method of tax accounting, unless such holder irrevocably elects to accrue acquisition discount currently. In the absence of an irrevocable election to accrue discount income currently, no accrual of acquisition discount is required by such a holder. Backup Withholding and Information Reporting. In general, information reporting requirements apply to many classes of holders of Taxable Notes with respect to payments of the principal of, payments of interest on, and the proceeds of the sale before maturity within the United States of such a note. Backup withholding may apply to holders of Taxable Notes under Section 3406 of 8

10 the Code. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner, and which constitutes over-withholding, would be allowed as a refund or a credit against such beneficial owner s Federal income tax provided the required information is furnished to the Internal Revenue Service. U.S. Holders. The term U.S. Holder means a beneficial owner of a Taxable Note that is: (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate the income of which is subject to United States Federal income taxation regardless of its source or (iv) a trust whose administration is subject to the primary jurisdiction of a United States court and which has one or more United States fiduciaries who have the authority to control all substantial decisions of the trust. IRS Circular 230 Disclosure. To ensure compliance with requirements imposed by the IRS, we inform you that (i) any Federal tax advice contained in this offering material (including any attachments) is not intended or written by the Bond Counsel to the Authority to be used, and that it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under the Code; (ii) such advice is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by the written advice; and (iii) the taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. Miscellaneous. Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Taxable Notes under state law and could affect the market price or marketability of the Taxable Notes. Prospective purchasers of the Taxable Notes should consult their own tax advisors regarding the foregoing matters. Liquidity Support The Authority entered into its current revolving credit agreement relating to the Notes effective January 20, 2011 (the 2011 RCA ) with JPMorgan Chase Bank, N.A., as Administrative Agent, the Bank of Nova Scotia, New York Agency, as Documentation Agent, and the following banks (with their approximate percentages of commitment shown): JPMorgan Chase Bank, N.A. (28.6%); The Bank of Nova Scotia, New York Agency (28.6%); State Street Bank and Trust Company (18.2%); Wells Fargo Bank, N.A. (15.5%); and The Bank of New York Mellon, N.A. (9.1%)(collectively, the Banks ). Each Bank is obligated on a several and not joint basis to fund only its respective percentage of any loan. Under the terms of the 2011 RCA, the Authority is able to borrow up to $550 million in aggregate principal amount outstanding at any time for the repayment of the Notes. The Authority has covenanted to have available borrowing capacity under the 2011 RCA of not less than the aggregate principal amount of the outstanding Series 1, Series 2, and Series 3 Notes. The 2011 RCA terminates by its terms on January 20, In the case of Terminating Events of Default by the Authority under the terms of the 2011 RCA, the Banks will, by written notice to the Authority, be able to immediately terminate their commitments to make loans. Terminating Events of Default under the 2011 RCA include (1) the Authority has failed to pay any amounts due for loans made under the 2011 RCA, has defaulted 9

11 on its obligations under any agreement or resolution which has caused an acceleration of maturity of its obligations secured thereby, has defaulted on the payment of principal of or interest on indebtedness having an outstanding principal amount in excess of $25 million, has applied for or consented to the appointment of a receiver, trustee or liquidator of its assets, commenced a voluntary case or filed a petition seeking reorganization, liquidation, composition of indebtedness or any arrangement with creditors under bankruptcy laws, or made a general assignment for the benefit of creditors, has had a judgment or order for the payment of money in excess of $25 million rendered and enforced against it which has remained unstayed for a period of 60 consecutive days; (2) both Moody s Investor Service and Standard & Poor s Ratings Services, a division of the McGraw-Hill Companies, Inc., have rated the Authority s senior obligations, the Notes, or obligations on a parity with the notes issued under the 2011 RCA below investment grade; and (3) either the 2011 RCA, or any note issued under the 2011 RCA, or any Note, has been adjudged to be invalid, illegal, or unenforceable against the Authority, or the Authority has denied liability under the 2011 RCA, notes, or the Notes. If any of the foregoing conditions are met, the liquidity support for the Notes outstanding provided by the 2011 RCA will terminate and will no longer be available for the payment of the Notes. Furthermore, in the case of a Non-Terminating Event of Default under the 2011 RCA, the Banks will be able to declare the obligation of each such bank to be terminated 35 days after written notice to the Authority from the Administrative Agent under the 2011 RCA, provided that the obligations of the Banks to make loans for the purpose of paying Notes outstanding on the date of such written notice would remain in effect to the extent and so long as necessary for the payment of the Notes at their maturity dates. Non-Terminating Events of Default include certain representations and warranties of the Authority are proved to have been incorrect in any material respect when made, and the Authority has defaulted in the performance of certain agreements or covenants and such default continues unremedied for 30 days after written notice from the Administrative Agent. In addition, in the case of any Event of Default under the 2011 RCA, the Banks will be able to declare the principal of and interest on all loans issued under the 2011 RCA to be immediately due and payable. Further, the obligation of the Banks to make loans under the 2011 RCA are subject to the conditions precedent that the Administrative Agent has received a notice of borrowing as provided in the 2011 RCA; that after making any such loan, the aggregate outstanding principal amount of loans shall not exceed the aggregate amount of the Banks commitments under the 2011 RCA; and that no Terminating Event of Default has occurred and is continuing. The Authority is able to terminate or reduce the commitments under the 2011 RCA upon five business days notice, but has covenanted in the Resolution to comply with the terms of, and maintain in full force effect, the 2011 RCA or a substitute facility as hereinafter described and to maintain aggregate borrowing authority thereunder in an amount at least equal to the aggregate principal amount of the Notes outstanding. The Resolution permits the Authority to substitute a revolving credit agreement with another comparable agreement or agreements with any other bank or banks provided that the senior securities of such bank, or securities secured by such bank's letters of credit, are assigned at least 10

12 an "A" or comparable rating by a nationally recognized rating service which is then rating the Notes. Any such substituted revolving credit agreement may have covenants, events of default, conditions to borrowing, and other provisions different from those referred to above. The Authority has agreed to provide notice to the holders of affected Notes of any change in the provider of liquidity support for such Notes, which notice is required to be given, to the extent practicable, not less than 30 days prior to the change. Senior Lien Indebtedness Revenue Bonds DEBT STRUCTURE As of December 31, 2011, the Authority had outstanding $1,083,380,000 in aggregate principal amount of Revenue Bonds (see the section above entitled THE COMMERCIAL PAPER PROGRAM Source and Priority of Payment ). The ART Notes Pursuant to a resolution adopted by its Trustees on April 30, 1985 (as subsequently amended, the ART Notes Resolution ), the Authority issued $200 million of Adjustable Rate Tender Notes (the ART Notes ) to pay for a portion of the cost of construction of its Marcy-South Project, of which $122,935,000 in aggregate principal amount was outstanding as of December 31, Liquidity support for the ART Notes is currently provided in accordance with a revolving credit agreement (the 2007 Revolving Credit Agreement ). As of the date of this Offering Memorandum, no borrowings under the 2007 Revolving Credit Agreement have taken place. The expiration date for the 2007 Revolving Credit Agreement is September 1, The ART Notes will mature on March 1, 2016 and March 1, The ART Notes and any notes issued under the 2007 Revolving Credit Agreement constitute Parity Debt under the Bond Resolution and thus rank senior to the Notes. Subordinated Indebtedness The Notes As of December 31, 2011, the Authority had issued and outstanding $499,574,000 in aggregate principal amount of the Notes. EMCP Notes As of December 31, 2011, the Authority had issued and outstanding $78,250,000 in aggregate principal amount of EMCP Notes. 11

13 Expected Debt Issuances in 2012 In 2012, the Authority expects to issue approximately $57 million of additional Notes (net of retirements) for energy services projects. No other new debt issuances are expected. Interest Rate Swap Transactions In 1998, the Authority entered into several forward floating-to-fixed interest rate swap agreements (collectively, the 1998 Swap Agreements ) in connection with proposed future bond issues, of which a notional amount of $81,815,000 remains outstanding. Pursuant to the Bond Resolution, payments to the counterparties relating to interest under the 1998 Swap Agreements are Parity Debt under the Bond Resolution and thus rank senior to the Notes, and the payment of any termination, or other fees, expenses, indemnification or other obligations to the counterparties under such agreements are payable as Subordinated Contract Obligations, on a parity with the Notes. The Authority entered into a ten-year floating-to-fixed interest rate swap agreement which commenced in September 2006 relating to its ART Notes (the ART Notes Swap Agreement ), having an initial notional amount of approximately $156 million, of which $122,935,000 is outstanding, and which declines over the term of the agreement to $75 million. The ART Notes Swap Agreement and the payments relating to any termination or other fees, expenses, indemnification or other obligations to the counterparty under such agreement are on a parity with the Notes. In connection with future debt issuances, the Authority may, subject to the approval of the Authority s Trustees, enter into additional interest rate swap agreements, either of the fixed-tofloating rate or floating-to-fixed rate variety, which may also include forward swaps. The payments relating to interest under any such swap agreements could be either senior to or on a parity with the Notes. The payments relating to any termination or other fees, expenses, indemnification or other obligations to the counterparties under such swap agreements would be on a parity with the Notes. Financial Results for 2011 (Unaudited) FINANCIAL RESULTS On an unaudited basis, net income for the year ended December 31, 2011 was $235 million compared to the budgeted amount of $179 million. Primary reasons for the positive variance from the 2011 budget include higher generation from the Niagara and St. Lawrence hydroelectric facilities reflecting significant levels of precipitation during the late winter and spring months, which resulted in higher energy sales into the New York Independent System Operator ( NYISO ) market, and a marked-to-market gain on the Authority s investment portfolio, offset by a decline in rest-of-state capacity revenues for the year, principally at the Niagara and Blenheim-Gilboa facilities. 12

14 Financial Results for 2010 The Authority had net income of $181 million in the year 2010, compared to $253 million in This $72 million decrease in net income is primarily due to higher nonoperating expenses ($65 million) as a result of higher voluntary contributions to the State. Operating income was slightly lower ($7 million) than the prior year. Lower fuel costs and higher purchased power expenses in 2010 were substantially attributable to changes in resources utilized to serve the Authority s SENY Governmental Customers necessitated by the cessation of operations of the Authority s Poletti plant on January 31, Wheeling expenses increased due to a Con Edison rate increase for delivery service to the SENY Governmental Customers. The majority of these cost variations were offset through revenues as they were reflected in customer rates. Nonoperating revenues increased by $6 million in 2010 including an increased mark-to-market adjustment for investments in 2010 due to lower market interest rates partially offset by lower realized investment income. CURRENT ISSUES AND DEVELOPMENTS 500-MW Plant and Cessation of Operation of Poletti Plant The 500-MW plant went into commercial operation on December 31, In connection with the licensing of the 500-MW plant, the Authority entered into an agreement which required, and resulted in, the cessation of operation of the Poletti plant (which had entered into service in 1977) on January 31, Small Clean Power Plants To meet capacity deficiencies and ongoing local reliability requirements in the New York City metropolitan area, which could also adversely affect the statewide electric pool, the Authority placed in operation, in the summer of 2001, the SCPPs, consisting of eleven natural-gas-fueled combustion-turbine power plants, each having a nameplate rating of 47 MW, at various sites in New York City and one site in the service region of the Long Island Power Authority. As a result of the settlement of litigation relating to certain of the SCPPs, the Authority agreed under the settlement agreement to cease operations at one of the SCPPs sites, which houses two plants, as early as the commercial operation date of either the 500-MW plant or another specified plant being constructed in the New York City area, if the Mayor of New York City directs such cessation. No such cessation has been directed or has occurred. The Niagara Project License The Authority filed its application for a new, 50-year Niagara Project license ( Application ) with the Federal Energy Regulatory Commission ( FERC ) on August 18, Four settlement agreements with various public and private entities were submitted to FERC for approval contemporaneously with the Application. Pursuant thereto, the Authority agreed that it would, among other things, provide monies for the establishment of a Greenway fund, a host communities fund, and certain ecological and land acquisition funds, as well as for a groundwater infiltration abatement project. The Authority also agreed that it would provide 25 13

15 MWs of power to certain host communities, provide 1 MW of power and certain land and other benefits to the Tuscarora Nation, undertake a series of improvements in recreational areas, and provide for continued out-of-state power allocations from the Project. In May 2006, the Authority reached a settlement agreement with Niagara University under which the Authority agreed that it would provide certain funds and an allocation of up to 3 MW of power among other things. In June 2006, the Authority reached an additional relicensing settlement agreement with the City of Buffalo and Erie County ( Buffalo/Erie County Agreement ) pursuant to which the Authority agreed that it would provide monies for establishment of a Greenway fund, a waterfront development fund, and other specified purposes. By order issued March 15, 2007, FERC issued the Authority a new, 50-year license for the Niagara Project effective September 1, In doing so, FERC approved the six relicensing settlement agreements entered into by the Authority with various public and private entities. The Authority currently expects that the costs associated with the relicensing of the Niagara Project will be at least $495 million (2007 dollars) over a period of 50 years, which does not include the value of the power allocations and operation and maintenance expenses associated with certain habitat and recreational elements of the settlement agreements. Of the $495 million, approximately $218 million has been spent as of December 31, The costs associated with the relicensing of the Niagara Project were incorporated into the cost-based rates of the Project beginning in Pursuant to an amendment to the Buffalo/Erie County Agreement dated February 11, 2011, the Authority agreed to accelerate its payments into the waterfront development fund such that it will make payments of $4.7 million per year through 2028 versus the original payment obligation of $3.5 million per year for 50 years. It is anticipated that during 2012 a local development corporation may issue bonds secured by such payments and in connection with such issuance, the Authority would designate the obligation to make such payments as a Subordinated Contract Obligation of the Authority under its Bond Resolution. Such Subordinated Contract Obligation would be on a parity with the Notes. Financial Assistance to the State For a discussion relating to financial assistance provided by the Authority to the State, see the section herein entitled LEGISLATION AFFECTING THE AUTHORITY AND OTHER MATTERS. New York Independent System Operator Pursuant to FERC Order No. 888, the New York investor-owned electric utilities (the IOUs ), the Long Island Lighting Company, a wholly-owned subsidiary of the Long Island Power Authority, doing business as LIPA (hereinafter referred to as LIPA ), the Authority, and certain other entities established two not-for-profit organizations, the New York Independent System Operator ( NYISO ) and the New York State Reliability Council (the Reliability Council ). The mission of the NYISO is to assure the reliable, safe and efficient operation of the State s major transmission system, to provide open-access non-discriminatory transmission services and to administer an open, competitive and non-discriminatory wholesale market for 14

16 electricity in the State. The mission of the Reliability Council is to promote and preserve the reliability of electric service on the NYISO s system by developing, maintaining, and, from time to time, updating the reliability rules relating to the transmission system, which must be complied with by the NYISO and all entities engaging in electric transmission, ancillary services, energy and power transactions. The Authority, each of the current IOUs and LIPA are Market Participants (which includes any entity engaged in the wholesale sale, transmission or purchase of electric energy) in the NYISO and members of the Reliability Council. The NYISO is responsible for scheduling the use of the bulk transmission system in the State, which normally includes all of the Authority s transmission facilities, and for collecting for ancillary services, losses and congestion fees from transmission customers. Each IOU and the Authority retains ownership, and is responsible for maintenance, of its respective transmission lines. All customers of the NYISO pay fees to the NYISO. Each such customer also pays a separate fee for the benefit of the Authority that is designed to assure that the Authority will recover its entire transmission revenue requirement. The Authority dispatches power from its generating facilities in conjunction with the NYISO. The NYISO coordinates the reliable dispatch of power and operates a market for the sale of electricity and ancillary services within the State. The NYISO surveys the capacity of generating installations serving the State (installed capacity) and the load requirements of the electricity servers, and provides an auction market for generators to sell installed capacity. The NYISO also administers day-ahead and real-time markets whereby generators bid to serve the announced requirements of the local suppliers of energy and ancillary service to retail customers. The Authority participates in these markets as both a buyer and a seller of electricity and ancillary services. A significant feature of the energy market is that prices are determined on a locationspecific basis taking into account local generating bids submitted and the effect of transmission congestion between regions of the State. The NYISO collects charges associated with the use of the transmission facilities and the sale of power and services bid through the markets that it operates and remits those proceeds to the owners of the facilities in accordance with its tariff and to the sellers of the electricity and services in accordance with their respective bids. Because of NYISO requirements, the Authority is required to bid into the NYISO day-ahead market ( DAM ) virtually all of the installed capacity output of its units. The NYISO then decides which Authority units will be dispatched, if any, and how much of such unit s generation will be dispatched. Such bids obligate the Authority to supply the energy in question during a specified time period, which does not exceed two days (the Short-Term Period ), if the unit is selected. If a forced outage occurs at the Authority plant which is to supply such energy, then the Authority is obligated to make certain payments during the Short-Term Period, the amount of which would depend upon market conditions in the NYISO DAM and the NYISO real-time market. In times of maximum energy usage, these payments could be substantial. In addition to the risk associated with Authority generation bids into the DAM, the Authority could incur substantial costs in times of maximum energy usage in purchasing replacement energy for its customers in the DAM or through other supply arrangements to make up for lost energy due to an extended outage of its units or the nonperformance by counterparties under energy supply contracts with the Authority. 15

17 Under the NYISO Open Access Transmission Tariff certain charges for congestion, losses, ancillary services and a portion of the Authority s transmission costs are assessed against the Authority and other entities responsible for serving ultimate customers. In the case of the Authority, such costs are significant and are currently being passed through to most Authority customers. Other Developments In response to the economic downturn s effects on New York s manufacturing sector, the Authority s Trustees in March 2009 approved execution of an agreement with Alcoa, Inc. to provide temporary relief from certain power sales contract provisions relating to the temporary shutdown of one of its two smelters served by the Authority in Massena, New York, including allowing Alcoa to release back to the Authority certain hydropower allocated to it, temporary waivers of certain minimum bill and employment thresholds, and entry into arrangements with the Authority for inclusion of a portion of Alcoa s load in the NYISO s demand response programs. In addition, in May 2009, the Authority s Trustees authorized a temporary program whereby up to $10 million would be utilized to provide electric bill discounts for up to a year to businesses located in Jefferson, St. Lawrence, and Franklin counties. These counties constitute the geographic region served by the Authority s Preservation Power program, discussed below under Other Authority Programs. The source of the $10 million was the net margin resulting from the sale of a portion of Alcoa s currently unused Preservation Power allocation into the NYISO markets. In September 2010, the Authority s Trustees approved extension of the electric bill discount program for the lesser of one year or the duration of the temporary curtailment of operations at the affected Alcoa facility. During the first quarter of 2011, Alcoa restarted the temporarily curtailed facility and the associated bill discount program ceased shortly thereafter. In March 2009, the Authority s Trustees approved the deferral for recovery in the future of a proposed hydropower rate increase for the Authority s municipal electric and rural cooperative customers, neighboring state municipal customers, upstate investor-owned utilities, and certain other customers that was scheduled to go into effect on May 1, 2009; and in August 2010 the Authority announced an extension of such deferral through the end of The deferral amounted to approximately $18.5 million through the end of In November 2011, the Authority s Trustees approved a 41-month rate plan providing for certain phased-in increases to these rates and the Trustees also approved commencement of rate recovery of the deferred amount. Further, in March 2009, the Authority also suspended the application of two annual, contractually-indexed hydropower rate increases for its Replacement Power, Expansion Power, and certain other industrial customers that were scheduled to go into effect on May 1, 2009 and May 1, 2010, respectively, totaling approximately $6.9 million. The Authority s Trustees in July 2011 approved the reinstatement of these indexed rate adjustments, resulting in an increase in these rates effective September 1, 2011 in the annualized amount of approximately $5.3 million. LITIGATION AFFECTING THE AUTHORITY In 1982 and again in 1989, several groups of Mohawk Indians, including a Canadian Mohawk tribe, filed lawsuits against the State, the Governor of the State, St. Lawrence and Franklin counties, the St. Lawrence Seaway Development Corporation, the Authority and others, claiming 16