Fitch Rates LIPA's (New York) $517MM 2006E Bonds 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings has assigned an 'A-' rating to the Long Island Power Authority's (LIPA) series 2006E electric system general revenue bonds. Fitch also affirms LIPA's outstanding $6 billion electric system general revenue bonds at 'A-'. The Rating Outlook is Stable.

The electric system general revenue bonds, including the series 2006E bonds, are secured by a pledge of net revenues that is senior to LIPA's $1 billion of subordinated bonds and $155.4 million of New York State Energy Research and Development Authority notes. The 2006E bonds will economically refund certain of LIPA's outstanding fixed rate electric system general revenue bonds. The 2006E bonds are scheduled to price Sept. 13, 2006, via negotiation, with Lehman Brothers as lead underwriter.

LIPA's credit strengths include solid financial performance, reasonable plan to meet power needs through 2015, ability to pass-through considerable fuel and purchased power costs on a timely basis, and a favorable and growing customer base. LIPA further benefits from effective risk management practices and a continued high level of service reliability.

Credit concerns center on significant exposure to fuel (natural gas/oil) commodity costs (over 95% of energy sources), high retail rates for the northeast region, and above average debt burden. Over the intermediate term (one-to-three years), LIPA's main credit drivers include:

-- Maintaining their financial position while keeping retail rates flat through 2007:

Fitch views LIPA's fuel adjustment surcharge favorably as it allows for timely recovery of volatile fuel and purchased power costs. However, earlier this year, LIPA pledged to keep retail rates flat through 2007, absent a major event or crisis impacting fuel supply. Limiting the use of this cost recovery mechanism reduces LIPA's ability to recover potentially increasing costs. To help mitigate this exposure, LIPA utilizes a fuel hedging program and most recently has benefited from increased operating margins. LIPA's operating margins have risen due to a decline in natural gas prices this year, which lowered LIPA's fuel costs and resulted in higher margins. LIPA further intends to set up a fuel reserve fund of $100 million once the revised operating agreements with KeySpan are approved and effective.

-- Continued progress on their power supply plan:

LIPA's power supply consists of primarily a mix of various power purchase contracts, many of which must be derived from generating units located on Long Island for reliability purposes. In 2004, LIPA outlined its long term plans to meet future power supply needs to 2015. Successful implementation of this plan is a key credit factor for LIPA, as evidenced by the recent heat wave on Long Island which resulted in a 10% hike in LIPA's peak demand in just one year. Thus far, the power supply, transmission and distribution projects are progressing as expected. LIPA is also reviewing its energy resource plan to determine the next wave of power resources needed in the 2015-2016 time frame.

-- Effectively managing the utility within a very political environment:

LIPA operates in an environment that can be quite politically charged. Fitch recognizes that LIPA has thus far effectively navigated the ongoing political issues, especially as it relates to cost recovery. Fitch's concern relates to any pressure that could impair LIPA's future use of the fuel surcharge mechanism. Earlier this year, several customers separately filed lawsuits against LIPA, essentially challenging LIPA's calculation of the fuel adjustment surcharge. The lawsuits have been consolidated into one action, to which LIPA filed a motion to dismiss the consolidated lawsuit back on May 17, 2006. Oral argument on the motion took place on July 10, 2006, and the court reserved decision on the motion and no date has been set by the judge as to when a decision will be rendered.

This credit concern, while ongoing, is somewhat mitigated by LIPA's willingness to have its fuel adjustment mechanism reviewed by an independent consultant. The New York PSC recently issued a ruling stating that it does allow utilities to use automatic adjustment clauses to recover a range of costs not limited to fuel costs. However, the PSC declined to review LIPA's fuel cost recovery methodology. As a result, LIPA plans to use an independent consultant. Fitch notes that most municipal electric systems do not have to go to such lengths to justify its rate methodology.

Fitch notes that earlier this year, National Grid plc announced its acquisition of KeySpan Corp. LIPA had already entered into several new operating agreements with KeySpan for much of LIPA's operations. Given the substantial incentives for both parties to have a mutually beneficial working relationship, Fitch views the potential acquisition as a neutral credit factor. LIPA has the option to terminate its agreements upon a change of control at KeySpan, although Fitch believes finding a replacement for KeySpan would pose a challenge to LIPA. National Grid recently filed its merger application with the PSC, which included a mechanism for sharing a portion of estimated synergistic cost savings with LIPA's customers as well.

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.

For additional information, see Fitch's March 9, 2006 credit report, available on the Fitch Ratings web site at www.fitchratings.com.

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