Fitch Rates Massachusetts WRA Sub General Revs At 'A+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 8, 2002

Fitch Ratings assigns an 'A+' underlying rating to the Massachusetts Water Resources Authority's (MWRA) $430,000,000 multi-modal subordinated general revenue refunding bonds. The offering consists of five separate series of variable rate refunding bonds, two of which, the $80 million series C and $76.45 million series D bonds, will be backed by letters of credit (LOC) from Landesbank Hessen Thueringen Girozentrale and Landesbank Baden-Wurttemberg, respectively. Ratings on the LOC-backed bonds, which will be sold by negotiation with Lehman Brothers (series C) and UBS PaineWebber, Inc. (series D), will be assigned nearer to closing. The remaining three series of refunding bonds will be auction rate securities that are expected to carry insurance from Financial Guaranty Insurance Co., whose insurer financial strength is rated 'AAA' by Fitch Ratings. The $83.4 million series E bonds will be sold by negotiation with J.P. Morgan Securities; Morgan Stanley & Co. will negotiate the $90.9 million series F bonds, and the $99.25 million series G bonds will be sold through Salomon Smith Barney. The MWRA has entered into an amortizing swap agreement with Goldman Sachs Capital Markets, L.P. to swap $350 million of the $430 million variable rate bonds to a fixed rate of 4.47%. The swap agreement terminates August 1, 2015. At this time, Fitch Ratings also affirms its 'A+' rating on the MWRA's outstanding subordinated general revenue bonds and its 'AA-' rating on its outstanding senior lien bonds. The Rating Outlook is Stable. The MWRA provides wholesale water and wastewater services to 61 communities located primarily in eastern Massachusetts, including most of the metropolitan Boston area.

The 'A+' rating principally reflects the MWRA's high quality management, as evidenced by the Authority's conservative financial practices and excellent long-term planning and project oversight. The MWRA has consistently demonstrated its ability to complete large, complex public infrastructure projects on time and under budget. Despite the revenue demands of a still sizable capital program and pressure from local members to minimize rate increases, Fitch anticipates that MWRA will continue to generate strong debt service coverage. The commonwealth's recent action to reduce its debt service assistance grant, which has historically accounted for about 10% of MWRA revenues, will have minimal impact on this year's budget as most of the $14 million cut can be recovered from workforce rightsizing, operating efficiencies, and additional refunding savings. Still, subsequent reductions may require rate adjustments. The MWRA's rates are among the highest in the urban U.S. and remain one of its most significant credit vulnerabilities, along with persistent judicial and regulatory monitoring. In light of the direct financial assistance provided by the state and its role in approving necessary borrowing cap increases, MWRA's credit can not be entirely separated from that of the 'AA-' rated commonwealth. The Boston Water and Sewer Commission (also rated 'AA-') is the Authority's largest local government member, accounting for 31% of wholesale charges.

In the aftermath of the massive capital investments of the 1990s, the MWRA's mission is now increasingly centered on combined sewer overflow (CSO) compliance and system rehabilitation and maintenance. The current 10 year capital improvement plan, which totals $1.7 billion and addresses substantially all current regulatory compliance issues, is a nearly 20% reduction from recent averages that partially reflects better project prioritization under the MWRA board's self-imposed spending cap. The more detailed fiscal 2003-2005 capital plan totals $892 million (in 2003 dollars), about the same size as the prior plan. Planned construction draws will require approximately $652 million in new general revenue bond issuance and state revolving fund loans during the three-year period.

Rate increases beyond fiscal 2003 are expected to be about 7.4% annually through fiscal 2007. For the past several years, the Authority has been able to manage to rate increases lower than forecast, largely due to favorable variances in debt service. The rate increase for fiscal 2003 is 2.9%, well below the 6.3% estimated in fall 2001. Subordinate lien coverage, including balances available in the Community Obligation and Revenue Enhancement Fund, is expected to exceed 1.2x during the forecast period, which is similar to recent performance. Senior lien coverage is forecast to be within the range of 1.7-2.0 times (x). In recent years, more favorable structuring of low-cost Massachusetts state revolving fund loans, low interest rates, and shrewd use of variable-rate and swap instruments have allowed MWRA to reduce costs passed on to ratepayers in member communities. After issuance of the current variable rate refunding bonds, aggregate variable-rate exposure will be about 18% of outstanding debt.

The MWRA's service area makes up about 43% of state population and is the state's economic core. Per capita, personal income in the Boston metropolitan area grew faster than the national average over the past decade and is now equal to 132% of the U.S. mean, ranking it 16th among the nation's 318 metropolitan areas. Although MWRA's rates are high when measured directly against other comparable systems in the U.S., they are more manageable when viewed proportionally to income.