Fitch Initiates Rating of City of Long Beach Gas Utility at 'A+', Stable Outlook

Business Wire, June 30, 2005

NEW YORK -- Fitch Ratings has assigned an initial rating of 'A ' to the City of Long Beach Gas Utility System (also known as Long Beach Energy) senior revenue obligation (implied). The Rating Outlook is Stable. The rating is implied as no senior lien debt is currently outstanding. The rating takes into account the gas utility's proposed issuance of $35 million in commercial paper notes (pricing July 2005 and rated 'F1 ' by Fitch). The CP notes are expected to be refunded with longer term gas utility debt by 2008. The CP notes are being issued to initially finance a portion of the gas utility's $56 million six-year capital improvement plan.

The Long Beach Gas Utility is a municipal natural gas distribution system providing service to approximately 145,000 primarily residential customers in and around the cities of Long Beach and Signal Hill, CA. The gas system's credit quality stems from its generally low-risk business, solid financial performance with strong cash flow and low leverage, well diversified customer base, and competitive gas retail rates. Debt service coverage for the past five years has ranged from 4.0 times (x) to 12x, well above average for the rating category. The gas utility also benefits from the ability to monthly pass through its most variable operating cost, natural gas, thereby mitigating cash flow volatility due to fuel commodity exposure.

The gas system maintains long-term gas supply agreements with Coral Energy Services and Pacific Summit Energy, both gas marketers, to meet nearly 100% of the gas requirements for its customers, with the remaining much smaller volume coming from local gas producers. The major supply contracts are favorable in that Coral's price is based upon the San Juan Basin market index, and Pacific Summit Energy's price is based upon the Southern California border market index. Hence, the delivered prices generally provide lower cost gas than purchases made from within the overall Southern California market. In addition, both contracts contain "floors" and "ceilings" on the price of natural gas that these suppliers can pass through to the gas utility. Both the gas supply agreements were purposefully structured to limit the gas system's exposure to extremely volatile natural gas prices, as occurred during the California energy crisis in 2000-2001.

Credit weaknesses include the level of gas utility transfers to the City of Long Beach, relatively low liquidity, and the need to replace the gas supply agreement with Coral Energy Services in 2006. While the near-term termination of the Coral gas supply contract is a credit concern, it is likely a similarly structured and adequately priced agreement can be entered into given the adequacy of natural gas supplies and pipeline capacity available in the region. The low liquidity, as measured by days operating cash (49 days at fiscal year-end 2004) is somewhat mitigated by the low risk profile of the gas distribution business and ability to monthly pass through the fuel cost to ratepayers. However, the liquidity is tight in comparison to other municipal utilities in the 'A ' category.

The main concern is the level and lack of predictability of gas transfers to the City of Long Beach. For the past five years, the gas system has transferred the equivalent of 5%-20% of operating revenues to the city's general fund. The variability in the transfer amount is due to the lack of any formal, calculable transfer policy. In addition, the transfers to the city can exceed the gas utility's cash flow, resulting in a drawdown from the utility's cash reserves. This risk is partially mitigated by the gas system's solid, ongoing cash from operations and strong financial coverage. Fitch stressed the projected financial ratios treating 50% of the transfer payment as a fixed cost, similar to debt service, and projected debt service coverage for the gas utility still remained at roughly 2.0x, solid for the rating category. However, going forward, Fitch will be looking for the utility to stabilize its liquidity and for the city to reduce the variability in the level of the transfers. It is important to note, the gas system's transfers to the city are limited by a city charter ruling, which prohibits gas retail rates from exceeding their neighboring competitors' rates.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies, and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.