Fitch Rates LIPA's $950MM Proposed Electric System Revs 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings has assigned an 'A-' rating to the Long Island Power Authority's (LIPA) series 2006A and B electric system general revenue bonds. In addition, Fitch affirms LIPA's outstanding $5.8 billion parity electric system general revenue bonds at 'A-'. The Rating Outlook is Stable. Proceeds from the 2006A bonds will refund $850 million of series 1998A bonds. The 2006B bond proceeds will fund or reimburse LIPA for $100 million of planned 2006 capital expenditures. The proposed bonds are fixed rate, senior lien securities with a final maturity of 2026 and 2035 for the 2006A and B bonds, respectively. The bonds are secured by a net revenue pledge of the electric distribution system and are scheduled to price on March 9, 2006, via negotiation, with Goldman, Sachs & Co. as lead underwriter.

LIPA's credit strengths include solid financial performance, a reasonable

power supply strategy, a favorable and growing customer base, and the ability to pass-through rising fuel and purchased power costs on a timely basis. Since its acquisition of LILCO in 1998, LIPA has matured as an electric distribution utility. The fuel and purchased power cost adjustment charge (FPPC) was revised to allow current year recovery of such costs, providing greater cash flow stability in periods of volatile fuel commodity prices, as is the case today. LIPA is further strengthening certain financial targets, including slightly higher net income and debt service coverage levels going forward, more in-line with comparable electric systems in the 'A-' rating category.

Additionally, in announcing LIPA's 1000 MW energy plan for Long Island in 2004, it solidified power resource needs through 2015, as opposed to the piece-meal power supply additions undertaken in LIPA's earlier years. Three of the five power projects in LIPA's 1000 MW plan are currently under construction or completed, and are on-time and within budget.

Credit risks include high retail rates for the northeast region, significant exposure to volatile fuel and natural gas commodity costs (over 95% of capacity needs), above average leverage, and a pledge to keep retail rates flat for the next two years. With the recent renegotiation of LIPA and Keyspan's management services agreement, and if approved by the NYS Attorney General and Comptroller later this year, LIPA will be able to establish a fuel reserve fund to allow LIPA to absorb more of the fuel cost volatility and help maintain stable retail rates. As for the high proportion of volatile fuel commodity exposure, LIPA's fuel hedging program, coupled with adequate cash reserves and the FPPC are varied tools to manage the exposure.

The credit concerns above are heightened by the very political Long Island environment LIPA operates in. LIPA has adequately managed political issues that have come up over the years (i.e., moving to a current year recovery for the FPPC in 2003/04 and assessing the re-privatizing of LIPA in 2005). Recently, two electric customers filed lawsuits against LIPA essentially taking issue with LIPA's calculation of the fuel surcharge and the fact that LIPA's rates have not been approved by the New York Public Service Commission (PSC). While Fitch does not believe the lawsuits pose a material credit concern, LIPA has decided to have their rate methodology reviewed by the PSC or some other independent authority to confirm their retail rate determination is in-line with others in the state. In comparison, most other municipal systems we rate would not need to go to such lengths to validate their retail rate methodology.

Lastly, Fitch views the recently announced acquisition of Keyspan Corp. (Keyspan) by National Grid plc (Nat Grid) as a net neutral credit factor, at this time. LIPA is having discussions with Nat Grid representatives to assess their ability as a distribution system operator and determine if a portion of the acquisition cost savings will be shared with LIPA's customers. LIPA has the option to terminate all Keyspan agreements in the event there is a change of control at Keyspan. While this gives LIPA some negotiating leverage, replacing all of the services provided by Keyspan personnel would not be simple. Fitch will be monitoring the outcome of the discussions with Nat Grid and the above mentioned lawsuits for any materially adverse developments.

The Long Island Power Authority, through its wholly owned subsidiary, LIPA, owns and operates an electric transmission and distribution system providing service to most of Nassau and Suffolk counties and the Far Rockaway section of Queens. LIPA serves about 1.1 million customers and had operating revenues of just under $3.3 billion for fiscal year end Dec. 31, 2005.

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