Fitch Affirms Massachusetts Industrial Finance --Hingham Project-- Revs At 'BBB'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 14, 2003

Fitch Ratings has affirmed the credit ratings of Massachusetts Industrial Finance Agency (MIFA) water treatment revenue bonds (Massachusetts-American Hingham Project), series 1995, at 'BBB'. The Rating Outlook is Stable. Approximately $37 million of revenue bonds are affected.

The rating affirmation followed a review of Aquarion Water Capital of Massachusetts, Inc. (formerly Massachusetts Capital Resources Company (AWCC, the lessor) and Aquarion Water Company of MA (formerly Massachusetts American Water Company (WaterCo, the lessee). The credit of the MIFA revenue bonds depends on the underlying secured note of AWCC, which in turn is supported by a security interest in leased assets (a modern water filtration facility), and lease payments from WaterCo. Pursuant to the net lease between AWCC and WaterCo, WaterCo as lessee is responsible for all operating, maintenance and future capital additions. The lease extends slightly beyond the maturity of the MIFA certificates. Revenues under the net lease are adequate to cover all debt service on the notes that underpin the MIFA revenue bonds. A debt service reserve fund is maintained equal to at least one calendar year's scheduled principal and interest payments, and covenants are reasonably strict. While both AWCC and WaterCo are direct or indirect subsidiaries of Aquarion Company., a U.S. subsidiary of the Kelda Group, the rating does not rely on any expected support from Kelda Group plc (Fitch senior unsecured rating 'A').

Fitch considers the payment capacity of the lessee WaterCo to be consistent with an unsecured credit profile in the 'low 'BBB'' category, reflecting the essential nature of the water service provided and stable customer demographics in the Massachusetts communities served. Credit measures as described below are stable and at the low end of the range for a for-profit water utility.

Fitch treats the present value of future rents on the operating lease as a debt equivalent, and on this basis, adjusted debt in 2002 was nearly 8 times (x) 2002 EBITDAR (earnings before interest, income tax, depreciation, and rent.) EBITDAR coverage of interest and lease rental payments was 1.3x in 2001 and 1.5x in 2002. While these credit ratios indicate high financial leverage, this is not out of line for a monopoly water utility with low business risk. In the first half of 2003 EBITDAR coverage was somewhat below the ratio for the like period of 2002. Credit ratios are expected to remain slim over the next few years, since WaterCo will be obliged to make ongoing capital investments for maintenance and growth, requiring additional debt funding.

Credit risks include WaterCo's need to improve the monitoring, metering, and conservation of water resources; related capital spending needs that exceed current cash from operations; water rates higher than those in other municipalities in the region; and exposure to regulatory lag in the tariff recovery of rising costs. These concerns are mitigated in part by the essential service provided and the company's monopoly water franchise and the high proportion of consumption by household and small commercial consumers. The need for ongoing debt funding is mitigated by a regulatory scheme that assures longer term recovery of costs from customer tariffs.

Recent Developments:

-- Water Co entered into an administrative consent order with the MA Department of Environmental Protection relating to water withdrawals that exceeded authorized limits in 1998 and 2001. As a consequence, a Water Needs Analysis determined that the capacity of the Hingham water supply is not adequate to meet projected average day demand and projected average summer day demands through 2020. New sources will be needed within the next five years. WaterCo is seeking DEP approval to utilize a well currently approved for use only under DEP-declared emergency conditions. Approval would increase the total withdrawal available to WaterCo and the volume of water processed by the Hingham filtration plant. Also, the company is required to continue its leak detection and meter replacement programs and implement an aggressive water conservation plan to help minimize the effects of recent rapid residential growth on water demand.

In Fitch's view, the circumstances described above bear watching but are generally consistent with trends affecting numerous water utilities. The leased facilities have greater capacity than current utilization, providing for future growth in consumption without incremental fixed costs. While WaterCo's currently authorized amount of water withdrawal supports the current revenues and financial ratios for the lease, the cap on water withdrawal limits WaterCo's chances to exploit this spare capacity and improve profitability and credit ratios. If additional well water use is not approved by the DEP, that would limit further economic development in the municipalities and rule out any opportunity for WaterCo to spread the fixed costs of the leased facilities over more units of production.

Aquarion Water Company of MA, formerly Massachusetts American Water Company and Aquarion Water Capital of Massachusetts, Inc., formerly Massachusetts Capital Resources Company, previously subsidiaries of American Water Works, were acquired by the Aquarion Company (a Kelda Group company) in 2002.