Fitch Rates Massachusetts Water Resources Authority's $830MM Revs 'AA'; Outlook Stable.

NEW YORK -- Fitch assigns an 'AA' rating to the Massachusetts Water Resources Authority's (MWRA or the authority) approximately $200 million general revenue bonds, 2007 series A, and approximately $630 million general revenue refunding bonds, 2007 series B. The bonds are scheduled to sell via negotiation on Jan. 17, 2006 through a syndicate led by Bear, Stearns & Co. Inc. Proceeds from the 2007 series A bonds will fund new capital projects and proceeds from 2007 series B bonds will refund and restructure portions of the authority's outstanding parity debt for rate relief and minimal present value savings. Fitch also affirms the 'AA' rating on MWRA's outstanding $3.0 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). As the MWRA completes the bulk of capital spending on combined sewer overflows over the next ten years, rate increases will become level and annual capital spending over the long term will primarily support maintenance projects. Reserves are expected to remain strong despite amendments to the bond indenture 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.

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 city of Boston, which contributes one-third of MWRA's revenue derived from rates and charges. The service areas are economically diverse generally, and wealth levels are above state and national averages.

MWRA's rates are among the highest in the urban US and an ongoing credit concern, somewhat mitigated by the high area income levels. The rate increase for fiscal 2007 is manageable at 4.9% and incorporates the anticipated receipt of $18.75 million in commonwealth debt service assistance. Beyond fiscal 2007, rates are projected to rise on average about 7.6% annually through fiscal 2012 due to rising debt service, personnel, and utility expenses. Projections appear reasonable although overall financial flexibility is slightly reduced as further operating efficiencies will be difficult to achieve. Historical debt service coverage has been strong and is expected to remain so: senior lien coverage without the affects of the restructuring is projected to range from 1.6 times (x) to 1.8x through fiscal 2012, above the 1.2x threshold established by bond resolution. Total debt service coverage including balances from the community obligation and revenue enhancement (CORE) fund, is projected to be adequate at just above the 1.1x threshold by bond resolution.

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 2007-2014 CIP, which totals approximately $1.1 billion and addresses substantially all current regulatory compliance issues, is significantly lower than prior capital plans, partially reflecting the significant scale of capital spending on the clean-up of Boston Harbor and the completion of almost 50% of the CSO master plan. Fitch believes future capital costs should remain manageable given MWRA's vigilant project oversight and its board's existing self-imposed spending cap.

The current offering includes $200M in new money for capital projects and the restructuring of $630M in outstanding debt. The bonds are being offered under an amended indenture which incorporates a significant reduction in restricted reserves. As liquidity remains strong and unaffected, it is Fitch's opinion that the amended indenture is still consistent with the current rating level.

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