Fitch Rates LIPA's $516MM Elec System Gen Rev 2006F Bonds ' A-'; Outlook Stable.

NEW YORK -- Fitch Ratings has assigned an 'A-' rating to the Long Island Power Authority's (LIPA) series 2006F electric system general revenue bonds. Fitch also affirms LIPA's outstanding $5.9 billion electric system general revenue bonds at 'A-'. The Rating Outlook is Stable. The electric system general revenue bonds, including the series 2006F bonds, are secured by a pledge of net revenues that is senior to LIPA's $1.0 billion of subordinated bonds and $155.4 million of New York State Energy Research and Development Authority notes. The 2006F bonds will economically refund certain of LIPA's outstanding fixed-rate electric system general revenue bonds. The 2006F bonds are scheduled to price Dec. 7, 2006, via negotiation, with Citigroup as lead underwriter.

Below are LIPA's primary credit strengths and weaknesses. For additional information, see the March 9, 2006 credit report, available on the Fitch Ratings web site at www.fitchratings.com.

LIPA's credit strengths include solid financial performance, a reasonable comprehensive energy plan to meet long-term power supply needs, ability to pass-through fuel and purchased power costs on a timely basis, and a favorable and growing customer base. LIPA further benefits from effective risk management practices, continued high level of service reliability, and the favorable settlement and extension of the various operating agreements with Keyspan to 2013.

LIPA's financial position has been bolstered in 2006 by a decline in fuel and energy prices, which have strengthened LIPA's credit protection measures, including debt service coverage (roughly 2.0 times [x] projected for 2006) and available cash reserves (approximately 130 days operating cash). As a result, LIPA implemented a 7.6% decrease in its fuel and purchased power cost adjustment (FPPCA) in October 2006, to pass-through $156 million in annual revenues back to its customers. In its recently announced budget, LIPA has pledged to keep rates, which contain the 7.6% lower FPPCA charge, flat for 2007, barring any major event or energy crisis having an impact on fuel supply. While this self-imposed limit on their FPPCA surcharge is a concern, LIPA's solid current financial position and ongoing fuel hedging and risk management practices help to mitigate the risk. Prospectively, assuming conservative load growth assumptions, reasonable forward fuel prices, and continued progress in the development/construction of the new power supply resources included in LIPA's comprehensive energy plan, the Authority should be able to maintain solid financial metrics through 2010, with minimal rate increases.

Credit concerns center on significant exposure to fuel (natural gas/oil) commodity costs (over 95% of energy costs), above-average retail rates for the northeast region, and relatively high debt burden. LIPA's average electric bills are high in comparison to the broader northeast region (average revenue per kwh [kilowatt hour] of 16.2 cents for 2005). However, given the limited power-importing capabilities onto Long Island, LIPA still manages to keep its average rates below that of its nearest competitor, Consolidated Edison Company of New York.

An added ongoing credit concern is the politically charged environment in which LIPA operates. LIPA has effectively managed the politically contentious issues to date, especially as it relates to the utility's cost recovery. The class action lawsuit filed by customers of LIPA earlier this year, challenging the Authority's calculation of the FPPCA, has since been dismissed by the court, in September 2006 -- a favorable development for LIPA -- although the plaintiffs have already filed a notice of appeal. LIPA continues to pursue having its fuel adjustment mechanism reviewed by an independent consultant to assess the reasonableness of the FPPCA in relation to the practices of other utilities in the state.

Fitch also notes that with the recent change in New York State's governor for 2007 there is the possibility that LIPA's longstanding Chairman could be replaced, as the job is a gubernatorially appointed position. Fitch views this development as a neutral credit factor at this time.

LIPA is one of the largest municipal electric distribution systems in the country, with over 1.1 million customers and over $3.3 billion in revenues. LIPA owns and operates an electric transmission and distribution system providing service on Long Island, NY, including most of Nassau and Suffolk counties and the Far Rockaway section of Queens.

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