2008-08-13 23:43:03 -

- Fitch Ratings has affirmed the Long Island Power Authority's (LIPA) outstanding $5.5 billion electric system general revenue bonds (senior lien) at 'A-'. Fitch has also revised LIPA's Rating Outlook to Negative from Stable due to pending state legislation (A.6164/S.3410) that could affect its ability to maintain timely and full recovery of costs in the future.

LIPA also has

$979.7 million subordinate lien electric system revenue bonds that do not have underlying Fitch ratings but rather enhanced credit ratings based upon the bank/financial institution providing the liquidity and/or credit support. LIPA further has $155.4 million New York State Energy Research and Development Authority (NYSERDA) bonds outstanding, which are obligations of KeySpan Corp. (recently acquired by National Grid, Plc) and $2.2 billion in capital lease obligations. LIPA's obligation on the NYSERDA bonds and the capital leases rank junior in payment to the subordinate lien bonds. LIPA's credit affirmation takes into account the likely refinancing of certain variable rate debt, totaling approximately $500 million, over the next few months.

The Outlook revision to Negative primarily reflects pending state legislation designed to give the New York Public Service Commission (PSC) - the state's corporate utility regulatory commission - legal authority to review LIPA's rate increase requests. Based on the current legislation as written, LIPA could be subject to a full evidentiary hearing by the PSC (9-to-12 month review process) for any average rate increase of more than 2.5% within a 12-month period. This type of state regulatory oversight is rare for municipal not-for-profit power systems, which traditionally operate with slimmer margins than their corporate brethren, in order to maintain the lowest cost of electricity for consumers.

The pending legislation is a credit concern as it may affect LIPA's ability to adequately recover costs on a timely basis. This level of rate regulation, particularly if it applies to the fuel/purchased power surcharge as well as base rate increases over 2.5% per year, is more restrictive than the regulatory oversight corporate utilities currently face.

The pending legislation was unanimously passed by both houses and is awaiting Governor Paterson's request for delivery, and ultimate approval and/or veto, possibly within the next month. Fitch will be monitoring developments regarding the pending legislation. Over the next 12-to-24 months, key credit factors that could trigger further negative rating action include: inability to achieve projected financial targets or remain current on fuel and purchased power expenses, and noticeably slower than anticipated sales growth during this period of increasing fuel and energy costs.

LIPA's rating affirmation reflects the system's primarily transmission and distribution based business, reasonable power supply strategy, adequate financial performance supported by solid cash reserves, favorable customer base and very reliable electric service. A key credit strength, particularly over past few years, is LIPA's utilization of a fuel and purchased power cost adjustment charge (FPPCA), which allows pass-through of rising fuel and purchased energy costs on a more timely basis. Management and the Board of Trustees have taken the necessary actions to maintain the utility's financial health, including adequate recovery of fuel and purchase power costs, which account for more than half of LIPA's operating expenses for fiscal 2007.

Credit concerns include LIPA's high electric rates, concentrated commodity exposure in more volatile fuels (natural gas/oil), and above-average leverage. While LIPA's retail rates are high relative to other municipal power systems in the region, their electric rates are still notably below their corporate counterpart, Consolidated Edison Company of New York.

Positively, with respect to LIPA's power resource base primarily concentrated in natural gas/oil fired purchases, LIPA is striving to diversify its fuel mix. In 2007 LIPA began purchasing power from the PJM electricity markets (Pennsylvania-New Jersey-Maryland) via the recently constructed Neptune Transmission Line. While LIPA decided to cancel its proposed 140MW (megawatt) wind farm in 2007, due to escalating project cost estimates, LIPA is looking for other renewable resources. LIPA is also targeting energy conservation of 15% by 2015. With moderate load growth assumptions, LIPA should not need additional power resources until post-2015.

LIPA's financial performance has stabilized with the more timely use of the FPPCA (rather than defer such costs over future years). Fitch calculated debt service coverage of senior and subordinate debt has ranged from 1.64 times (x) to 1.94x, from 2004 to 2007. Including capital lease obligations as direct debt service, the coverage ratio declines to 1.40x-1.65x - still adequate for the 'A-' rating category. Going forward, Fitch will be looking for the Board's continued willingness to set rates adequate to maintain LIPA's financial position.

The Long Island Power Authority, through its wholly owned subsidiary, LIPA, owns and operates an electric distribution system providing electric service to most of Nassau and Suffolk counties and the Far Rockaway section of Queens. LIPA serves over 1.1 million customers and had operating revenues of approximately $3.5 billion for fiscal year-end Dec. 31, 2007.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Lina Santoro, 212-908-0522
Alan Spen, 212-908-0594
Cindy Stoller, 212-908-0526 (Media Relations)