Fitch Rates Greater New Haven Water Pollution Control Authority, Connecticut Wastewater Revs 'A-'; Stable Outlook.

NEW YORK -- Fitch Ratings assigns an underlying 'A-' rating to Greater New Haven Water Pollution Control Authority, CT (the GNWPCA, or the authority) approximately $92 million regional wastewater system revenue bonds, 2005 series A. The bonds are expected to price the week of Aug. 22 through negotiation with a syndicate lead by Lehman Brothers. Bond proceeds will be used to purchase the wastewater treatment assets of the City of New Haven and towns of East Haven, Hamden, and Woodbridge (constituent municipalities), as well as to pay the municipalities for debt related to infrastructure and establish reserves. The Rating Outlook is Stable.

The underlying 'A-' rating for GNWPCA reflects its independent rate-setting authority, stable service area, and manageable capital needs. Concerns pertaining to the creation of the new regional authority are somewhat mitigated by the nominal changes in management and operations from the New Haven Water Pollution Control Authority, which served the area's wastewater treatment needs for the prior 30 years. Other credit factors include the area's below-average income levels, declining water consumption requiring steady rate increases going forward to meet operations, and weak legal provisions. Assuming the issuance of additional debt as per the five-year capital improvement plan (CIP), the projected coverage levels are expected to be close to the legal requirement of 1.15 times (x), including some use of reserves.

The GNWPCA owns and operates a wastewater collection and treatment plant that serves an 83-square mile service area including four contiguous municipalities. The area was historically served by the New Haven Water Pollution Control Authority, an enterprise fund of the City of New Haven. The regional authority was created to consolidate services, improve the overall wastewater system performance, and maintain adequate wastewater management and water pollution control services. Despite the population declines in New Haven, which includes nearly half of the customers, healthier population trends in the other constituent municipalities have contributed to a stable customer base, showing a 0.3% average annual growth in the past five years, and projected to remain level going forward. The top customers provide 9% of total revenues, led by Yale University. Below-average income levels are a challenge for the service area. In 2000, the weighted average of the area's per capita income was 73% of the state and 97% of the nation.

The system's legal provisions are liberal. The rate covenant requires 1.15x aggregate annual debt service coverage from net revenues, including reserves and 1.0x excluding reserves. The additional bonds test (ABT) requires the authority to meet the 1.15x coverage requirement based on revenues from the last available audit and in the current year accounting for adopted rate increases. While the ABT is forward looking, it allows for coverage on aggregate annual debt service to be met from projected rate increases and it is not until the fifth year following the year in which additional bonds are issued that MADS must be covered by 1.15x. Coverage calculations can also include draws on reserves not to exceed 15% of aggregate annual debt service.

Financial operations are average as the system is managed very tightly to the 1.15x debt service requirement. An operating reserve of approximately $5 million, funded with the current bond offering, provides some cushion. A key credit strength is the system's independent rate-setting authority. Given the declining water consumption of nearly 9% over the past five years due to water conservation programs along with the system's capital needs, the authority has adopted a rate increase effective in fiscal 2006 and expects to continue raising rates annually through 2010. The 2006 minimum bill represents a significant 48% increase above New Haven's former rate, and a 14%-29% increase above the other three constituent municipalities. However, New Haven residents benefit from an $8 million rate stabilization fund, which is expected to offset the rate increases through fiscal 2009. Fitch expects the system to maintain its historical practice of conservatively budgeting collections at 93% and to maintain an operating reserve necessary to offset the potential expenditure over-runs of a new authority.

Pursuant to the asset purchase agreement between the authority and the constituent municipalities, besides the $54 million purchase price of the assets, approximately $28 million of the current offering will be used to defease the outstanding general obligation debt related to system improvements. Furthermore, as permitted under the indenture, the authority is expected to assume an additional $33 million of obligations borrowed by the constituent municipalities under the state's Clean Water Fund program.

The system's $394 million capital improvement plan (CIP) through 2020 is manageable and focused on the long-term combined sewer overflow (CSO) control plan adopted in 2002. Funding sources for the CIP include 84% from Clean Water loans and grants with the remainder from bond proceeds.

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