Fitch Rates New Britain, Connecticut's Water V-R Rev Bonds, Series 2005 'A'.

NEW YORK -- Fitch Ratings assigns an initial 'A' rating to the city of New Britain, Connecticut's $14,000,000 variable rate demand revenue bonds, series 2005. The bonds are expected to sell on or about April 7 through negotiation with William Blair & Company. The bonds are special obligations of the city, payable from a first lien and pledge of net revenues of the water system. Fitch expects to assign long- and short-term ratings to the variable-rate bonds, based on both a municipal bond insurance policy and a liquidity facility, closer to their closing. Bond proceeds will be used to refund notes issued to finance the city's new water treatment plant and related infrastructure. The Rating Outlook is Stable.

The 'A' rating is based on New Britain's sound water system finances, stable service area, and affordable five-year capital improvement plan (CIP). While the expiration in 2006 of service agreements with two of its top 10 customers is of concern, the contracts currently generating 8% of total revenues are expected to be renewed given their own limited supply and New Britain's ample storage capacity. Due to rate increases since 1999, debt service coverage is strong and projected to remain above the rate covenant of 1.25 times (x), although dependent on additional rate increases through 2008, which may raise the rates above the regional average.

New Britain (general obligation bonds rated 'A' with a Negative Rating Outlook by Fitch) is located approximately eight miles southwest of Hartford with a population of slightly more than 71,000. The city's employment base is diversified but somewhat stagnant. Residential employment decreased in each of the past four years. The city's unemployment rate is above state and national averages, reaching 8.3% in 2004. Growth in the net taxable grand list is limited but still apparent in the 1.34% increase effective in fiscal 2006. Income levels are below state and national averages.

The city owns nearly 6,600 acres outside its limits in order to extend the water system's capacity to the bordering towns of Berlin, Farmington, Newington, and Plainville. Besides the 17,000 direct-service connections, the system also has three service agreements. While the contract with the Kensington Fire District expires in 2021, the agreements with the Bristol Water Department and the Berlin Water and Sewer Commission sunset in June 2006. The contract with Bristol is expected to be renewed with similar terms; however, Berlin's minimum purchase requirement may be reduced, since it is seeking state legislation for its own well-field. Nonetheless, Berlin is expected to still rely on the system given its water pressure needs. Unlike most water systems in the region, New Britain's water supply has excess capacity of 20% above its maximum anticipated demand.

Revenue bond debt service coverage is strong as 2004 pledged revenues provide 5x maximum annual debt service (MADS) and is projected to remain at least 3.1x by 2006. Average annual rate increases of 11% since 1999 have contributed to the system's sound financial position. Rates remain slightly below average in comparison to other systems in the region but may not be as competitive going forward as additional rate increases are planned through 2008. Assuming such rate increases are implemented, annual debt service coverage is projected to remain above 4.2x for parity debt and 1.0x for all debt, including subordinate obligations with the state's Drinking Water State Revolving Loan Fund. Further, although unlikely if the service agreements expiring next year are not renewed, coverage of MADS would remain sound at a minimum of 2.8x.

The system's future capital needs are manageable with a $15 million CIP through 2010. Most of the plan consists of maintenance projects and will be completed in collaboration with other city departments. The projects will be funded out of the operating budget and city officials do not plan for additional parity debt.