Fitch Rates MA Water Resources Auth $481.8MM Revs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the Massachusetts Water Resources Authority's (MWRA or the authority) approximately $200 million general revenue bonds, 2006 series A, and approximately $281.8 million general revenue refunding bonds, 2006 series B. The bonds are scheduled to sell via negotiation on March 1 through a syndicate led by Citigroup. Proceeds from the 2006 series A bonds will retire outstanding commercial paper, and proceeds from 2006 series B bonds will refund portions of the authority's outstanding parity debt for interest savings. Fitch also affirms the 'AA' rating on MWRA's outstanding $2.7 billion of general revenue bonds and the 'AA-' rating on the outstanding $2.6 billion of subordinated general revenue bonds. The Rating Outlook is Stable.

The 'AA' rating is based on MWRA's sound financial operations and operating track record. Effective financial management is demonstrated by the authority's ability to achieve favorable operating results despite significant declines in commonwealth debt service assistance. Furthermore, the authority's prudent budgetary practices, comprehensive long-term planning, and vigilant project oversight and prioritization have helped reduce spending on the complex capital improvement plan (CIP). With a majority of court-mandated projects at or near completion in the short term, rate increases in the out-years will become level. Reserves are considerable, and strong debt service coverage is expected to continue. Rates charged by the authority are among the highest in the urban U.S. and remain one of the most significant credit vulnerabilities. However, this credit risk is mitigated somewhat by the above-average wealth levels of the service areas and the impeccable collections rates at 100% since the authority's inception.

Following the massive capital investments undertaken during the 1990s, MWRA's mission is now increasingly focused on combined sewer overflow (CSO), regulatory compliance, and system rehabilitation and maintenance. The adopted fiscal years 2006-2013 CIP, which totals approximately $1.2 billion and addresses substantially all current regulatory compliance issues, is significantly lower than prior capital plans, partially reflecting the acceleration of certain CSO projects and reduction of non-essential projects in the out years. Spending on projects may increase due to the incorporation of these previously deleted projects. However, Fitch believes future capital costs should remain manageable given MWRA's vigilant project oversight and its board's existing self-imposed spending cap.

The rate increase for fiscal 2006 is manageable at 4.2% and incorporates the anticipated receipt of $10 million in commonwealth debt service assistance, compared to 6.5% when the commonwealth debt service assistance is excluded. Beyond fiscal 2006, rates are projected to rise on average about 7.8% annually through fiscal 2011 due to rising utility and personnel expenses and debt service costs. Projections appear reasonable, and officials prudently assume no commonwealth debt service assistance beyond the current year. Historical debt service coverage has been strong and is expected to remain so: senior lien coverage is projected to range from 1.8 times (x) to 2.0x through fiscal 2011, well above the 1.2x threshold established by bond resolution; and subordinate lien coverage, including balances in the community obligation and revenue enhancement (CORE) fund, is projected to be adequate at just above the 1.1x threshold by bond resolution.

MWRA provides wholesale water and wastewater services to 61 communities located primarily in eastern Massachusetts. Approximately 2.6 million people (or 43% of the total population of the commonwealth) reside in the authority's service areas, the largest of which is the metropolitan Boston area, which contributes fully one-third of MWRA's revenue derived from rates and charges for fiscal 2006. The service areas are economically diverse generally, and wealth levels are above state and national averages.

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