Fitch Affirms Philadelphia, Pennsylvania's Gas Works Revs at 'BBB-/BB+'.

NEW YORK -- Fitch Ratings has affirmed and removed from Rating Watch Negative the following underlying ratings for City of Philadelphia, PA:

--$719 million senior lien gas works revenue bonds (1998 ordinance);

--$326 million gas works revenue bonds (1975 ordinance) 'BBB-';

--$14.3 million subordinated gas works revenue bonds (1998 ordinance) 'BB+'.

Fitch originally placed the Philadelphia Gas Works (PGW) bonds on Rating Watch Negative on Oct. 14, 2005. The Rating Outlook is Stable.

The Rating Watch removal is the result of sustained improvement in collection rates since fiscal 2003, which has resulted in a stabilization of the utility's liquidity position. In particular, Fitch views favorably financial improvement achieved despite recent wholesale gas price increases. In addition, a strengthening of the city's financial position bodes well for the future fiscal health of the city owned utility (Philadelphia's general obligation (GO) bonds rated 'BBB+' with a Stable Outlook by Fitch). PGW continues to rely heavily on external liquidity, including cash flow support from the city and a commercial paper line of credit. Fitch expects that the utility will seek to bolster its internal cash position by requesting future rate increases from the state Public Utility Commission.

The 'BBB-' rating chiefly reflects PGW's constrained liquidity position. The fulfillment of operating commitments, including debt service, relies heavily on external sources of liquidity. Credit strengths include the utility's strong management team and well maintained system assets. The Rating Watch Negative reflected Fitch's concern that improved collections rates could be sustained during winter 2005-2006, given the large increase in monthly bills due to a significant increase in the wholesale price of gas. The fiscal 2006 budget assumed a 94.5% collection rate, which was high compared to historical rates; in fiscal 2003 the collection rate dropped to a low of 86.6%. Actual results through June 2006 indicate a twelve month rolling collection rate of 94.3%, and officials project that the collection rate by the close of fiscal 2006 at the end of August will be about 94%. The impact on cash receipts of a .5% deviation from the budgeted 94.5% collection rate is only about $5 million, compared to budgeted gas billing receipts of $1 billion.

External sources of liquidity include cash flow support from the city and a $150 million commercial paper line of credit. Favorably, the utility was able to renew its credit line in August 2005 for a 21 month period. PGW's owner, the City of Philadelphia, recently adopted a five year financial plan that defers a $45 million PGW loan repayment to fiscal 2008 and grants back the utility's annual $18 million return on investment payment through fiscal 2011. Mainly due to improvement in its financial position, Fitch revised the Rating Outlook on the city's GO debt to Stable from Negative on July 7, 2006.

Debt service coverage based on audited results improved somewhat in fiscal 2005 compared to fiscal 2004. Aggregate coverage, inclusive of all long-term debt and the commercial paper line of credit, was 1.3 times (x) in fiscal 2005 compared to 1.2x in fiscal 2004. The utility anticipates its next new money debt issuance will occur in late calendar 2006 to fund a portion of the five-year $330 million capital improvement plan, which is focused on maintenance of gas processing facilities and the installation of new and replacement gas mains and meters.

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