Fitch Rates Chicago, IL's $217MM Second Lien Water Rev Bonds 'AA'.

CHICAGO -- Fitch has assigned an 'AA' rating to the City of Chicago, Illinois' $216,900,000 second lien water revenue bonds, series 2006A. In addition, Fitch affirms the 'AA' rating on $681.2 million of outstanding second lien water revenue bonds. Fitch also affirms the 'AA+' rating on $309.3 million of outstanding senior lien water revenue bonds. The Rating Outlook for these ratings is Stable. E[acute accent]The bonds will price on July 11 through a syndicate led by M.R. Beal & Co. Proceeds will retire $96.2 million of outstanding commercial paper and finance about $120 million of water system improvements. Net revenues must cover senior lien debt service by 1.2 times (x) and second lien debt service, after senior debt service, by 1.1x. E[acute accent]The 'AA+' rating reflects the strong economic diversity and wealth of the Chicago region served by the Chicago Water System (CWS), stable financial performance, very competitive user rate structure, and moderate capital program. Serving both city residents and a growing suburban customer base, the CWS has been increasing its customer accounts as conservation efforts have stabilized system demand. The system has a high-quality water source from Lake Michigan and only used about 64% of its pumping capacity in 2005. Meeting all of its water quality standards, the system has a manageable capital program which, combined with very low operating cost, will allow maintenance of relatively low user charges. E[acute accent]Encompassing over half of IL's economy, the system's broad and growing city and suburban service area are key credit strengths. Per capita income for Cook and DuPage counties is above national and state averages. Service sector growth has outpaced durable goods manufacturing in recent years. Largest employers are spread across the government, retail, electronics, telecommunications, transportation, and health care sectors. Fitch rates the general obligations of Chicago ('AA'), Cook County ('AA') and DuPage County ('AAA'). E[acute accent]System fundamentals are very strong, presenting little operational, financial, and regulatory risk. The utility's two water purification plants on the Chicago lakefront are the largest in the world and have sufficient capacity to meet future growth demands. Illinois and the seven other Great Lake states signed a memorandum of understanding in 1996 which established regional cooperation for water utilization. Although other states believed that IL exceeded its water use limit, the state agreed to use less than 3,200 cfs (cubic feet per second) for the following 20 years, limit leakage at the Chicago River Controlling Works and promote conservation. The city was not part of the understanding, but established a conservation plan in 1989 which addressed transmission leaks and promoted metering of residential and other large customers. In the last 10 years, average daily water pumpage has decreased to 925 million of gallons per day (mgd), from 1,022 mgd in 1996, allowing the city to meet demand comfortably for the next 20 years. Although other suburban communities that still depend on groundwater sources represent new sources of system demand, the Chicago water system must continue to abide by regulatory limits on the use of lake water, necessitating conservation efforts. E[acute accent]Financial performance has been solid due to operating efficiencies and moderate rate increases. Senior lien debt service coverage averaged 1.5x in the 2001-2004 fiscal years (Dec. 31 year-end), but improved to 3.4x in 2005 due to increased water consumption, implementation of a 3.0% rate increase, and reduced senior lien debt servicing cost. Combined senior and second lien coverage, which reached a low point of 1.1x coverage in 2003, equaled 1.7x in both 2004 and 2005. E[acute accent]The water fund's rate stabilization account, used to hold discretionary funds after meeting required deposits in revenue bond accounts, has been unchanged at $52.3 million for the last three fiscal years. Following rate increases of 3% in 2003 and 2004, the city council has not implemented rate increases through 2007. Assuming no subsequent increases, senior lien debt coverage will decline to 2.2x by 2007; combined senior and second lien coverage is estimated to be 1.5x in 2006 and 1.0x in 2007 and 2008. E[acute accent]Water quality is largely in compliance with current regulations and additional near-term mandates. About 40% of the $542.7 million capital plan through 2010 will finance upgrades at the city's two treatment plants and conversion of pumping stations to more economical electric power from steam power; the remaining 60% will finance distribution improvements which, to date, have reduced systemwide leakage to 11%. The Water Management Department replaces annually about 32 miles of water mains. Although a large share of capital spending will be financed through debt, the department has some project flexibility toward the end of the five-year capital program.

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