Fitch Rates De Pere, Wisconsin's $4.5MM Water Rev Bonds 'AA-'; Stable Outlook.

CHICAGO -- Fitch Ratings assigns an 'AA-' rating to De Pere, Wisconsin's $4.48 million water utility revenue bonds, series 2007. The bonds are scheduled for competitive sale on Feb. 21, with Springsted, Inc. serving as financial advisor. The bonds are payable from the net revenues of the city's water utility system (system). In addition, the city pledges its moral obligation to replenish the system's reserve account, if necessary. Bond proceeds will finance various capital improvement projects including construction of a reservoir and water mains. The Rating Outlook is Stable.

The 'AA-' rating reflects the economic strength and wealth of the system's service area, moderate projected coverage levels, and limited capital needs which are anticipated to be fully funded from internal sources. The system's service area continues to gain strength through a strong local employment base and employment opportunities in the greater Green Bay metropolitan area. This issue represents the only direct debt of the system, with coverage levels based on 2005 revenues estimated at nearly 3.0 times (x). In addition, the system historically has funded its capital needs through internal sources and with little anticipated future debt issuance. The system is a charter member of the Central Brown County Water Authority ([CBCWA] rated 'AA'/Stable Outlook by Fitch) which will provide high quality lake water to the city at stable rates. About three-quarters of De Pere's water system budget relates to support of the CBCWA's financing costs.

The system provides water to all of the city of De Pere and operates six deep wells, several reservoirs, and a distribution network. Customer growth averaged 2.2% annually over the last five years, with future growth anticipated to continue at 1% to 2% annually. The system's average demand of 2.4 million gallons per day (mgd) and peak demand of 5.3 mgd in 2005 are met with adequate pumping capacity of 14.5 mgd of the system.

In response to the state requiring communities to mitigate water quality concerns related to radium and other contaminants by the end of 2006, the city with five other communities formed the CBCWA. The city and other members entered a 35-year contract with the CBCWA which in turn formed an agreement with nearby City of Manitowoc Public Utilities (MPU) to provide water from Lake Michigan. The CBCWA sets rates based on operation and maintenance costs (including purchased water from MPU), capital-related costs, and reserve fund costs. Rates charged by MPU to the CBCWA are subject to state public service commission approval; however, CBCWA rates charged to its members are not. Construction of the CBCWA pipeline is 99% complete and the system anticipates receiving water service from the CBCWA by mid-2007.

Reflecting its proportionate costs of the CBCWA project, the city approved several rate increases over the last five years, increasing water rates overall by approximately 250% to 300% over this time period. Despite these rates increases, the system's current water rate is the lowest among CBCWA members and comparable to nearby Green Bay and Ashwaubenon. Based on CBCWA projections, the system expects stable rates for the foreseeable future since most of the capital infrastructure is complete.

With De Pere's transition to a system drawing water from Lake Michigan now complete, financial performance will demonstrate greater stability. CBCWA's members will shoulder full system expenses with completion of its capitalized interest. Overall, the system's budget increased to $5.1 million in 2007 from $1.3 million in 2004, representing an average annual increase of approximately 60%, as a result of the switch to CBCWA provided water. Based on 2005 net revenues, the city projects coverage of annual debt service to approximate 2.8x for the life of this issue. Fitch estimates coverage levels of approximately 2.4x in 2007.

Historically, the system spends approximately $0.5 million annually from internal sources for water main replacement and other capital needs. Proceeds from this issue will finance improvements largely related to the transfer to CBCWA provided water, including construction of a reservoir and also water main construction in relation to several major road and bridge projects in the city. In addition, with CBCWA now providing water, future capital expenditures will be limited to the system's water distribution network, requiring little, if any, future debt issuance.

Located approximately five miles south of Green Bay along the Fox River in Brown County, De Pere is part of the third-largest economic center in Wisconsin. As one of the fastest growing regions in the state, the county recorded above-average gains in employment, earnings, and per capita income levels over the past several years. An expanding service sector fostered diversification in the regional economy, reducing its historical dependence on non-durable goods manufacturing. An additional indication of the strength of the economy is the higher than average per capita income of the city at 110% of the county's, 113% of the state's and 111% of the nation's in 1999, an increase from 106%, 111%, and 102%, respectively in 1989.

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