Fitch Upgrades Anchorage Muni Light & Power to 'A+' from 'A'.

NEW YORK -- Fitch Ratings upgrades the underlying rating on Anchorage Municipal Light and Power (ML&P) outstanding $210 million electric revenue bonds to 'A+' from 'A'. The Rating Outlook is revised to Stable from Positive.

The rating upgrade reflects several improvements to ML&P's credit fundamentals that Fitch initially highlighted in its Sept. 23, 2005 release. Key improvements and credit underpinnings reflect clear progress associated with the utility's favorable power resource position, cost advantage relative to other Alaskan utilities and financial profile. In addition, ML&P is moving forward with its capital plan that is expected to further lower the utility's cost of power through greater system efficiencies. Notably, as of January 1, 2006, ML&P now receives 100% of its natural gas needs through its one-third ownership interest in the Cook Inlet Beluga River Gas Field (Beluga), taking delivery at below-market natural gas prices. This has lowered the utility's cost of fuel to about $1.82 per MCF, with the savings directly passed through to customers. (Over the past year, residential rates have declined by about 22% to $65.87 per 750kWh as of June 2006). At the same time, the utility continues to generate sizable monetary proceeds from its resale of surplus (underlift) gas back to its Beluga partners. Favorably, in fiscal 2003 and 2004, ML&P generated $36 million in underlift proceeds, which approximately $32 million is expected to be used to cash fund planned capital improvements with the balance to reduce other regulated liabilities.

As part of its current five year capital plan, management expects up to 227MW of new gas generation assets online to replace and retire various older units, at a cost of $150 million - $200 million. In addition, management has about $100 million of other system capital improvements planned during this period. Beneficially, the modernization of the generation fleet is expected to lower the average cost of production. This will result from reduced maintenance costs and improved fuel efficiency, given the new units favorable heat rates, and will position the utility nicely for the future when ML&P's cost of power is expected to increase with the declining production of Beluga field gas in the 2018-2025 timeframe.

ML&P maintains solid financial policies that have provided stable financial margins over the past few years. These financial policies have resulted in improved equity, as well as low operating leverage of 4.9 times (x) debt to funds available for debt service (FADS), which is in line with that of other 'A+' rated public power systems. For fiscal 2005, the utility maintained 157 days cash on hand, and direct debt service coverage was a strong 1.98x. Recently, ML&P received approval to begin transferring a dividend to the Municipality of Anchorage (expected to be about $7.4 million in 2006). Even so, ML&P's projections indicate maintenance of debt service coverage levels above 1.60x, allowing the system to fund its capital plan with a 60/40 mix of debt and equity.

Credit concerns focus on the regulatory risk associated with the Regulatory Commission of Alaska's (RCA) oversight of ML&P's electric rates and use of underlift proceeds. Constructively, ML&P does not expect to go to the RCA for a new rate case approval until 2009, when the utility expects to request a reasonable 4% base-rate increase. To the extent future underlift proceeds become available (approximately $40 million in underlift proceeds are conservatively estimated through 2018) management has the ability to petition to the RCA to use these proceeds to offset future borrowings upon approval from the RCA. Fitch will continue to monitor the impact of any RCA regulatory action on ML&P's financial position going forward.

ML&P is an integrated retail electric utility, providing service to about 30,000 customers, accounting for about 50% of retail electric sales within Anchorage. The remaining population of the municipality is served by Chugach Electric Association (rated 'A-' by Fitch). ML&P's customer base includes a large portion of the commercial, industrial and high-density residential accounts with the municipality. In addition, ML&P provides all-requirements wholesale power to two military bases and economy sales to other electric systems along the 584-mile Alaska rail belt.

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