Fitch Rts $734MM San Diego MWWD, CA Sub Lien Revs 'A+'.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--July 16, 2003

Fitch Ratings assigns an 'A+' rating to $734 million Public Facilities Financing Authority of the City of San Diego (the authority) subordinated sewer revenue bonds, series 2003A and series 2003B issued on behalf of the San Diego Metropolitan Wastewater Department (MWWD). The bonds are scheduled to sell via negotiation on Sept. 9 led by UBS Financial Services Inc., Merrill Lynch & Co., and Redwood Securities Group, Inc.

The bonds are subject to optional and mandatory redemption as specified in the official statement. Proceeds will help finance a substantial portion of the Metropolitan Wastewater Department's capital improvement plan and refund outstanding senior lien bonds to achieve debt service savings. In addition, Fitch assigns an initial rating of 'AA-' to the authority's approximately $632.5 million of outstanding senior lien bonds. The Rating Outlook is Stable.

MWWD provides wastewater service to nearly 2 million residents across a diverse 450 square mile service area. The 'AA-' rating on the senior lien bonds and 'A+' rating on the subordinate lien bonds reflects MWWD's healthy financial profile, progress in meeting environmental mandates, and a large, growing and diverse service area. The ratings also reflect the still sizable capital program and long-term concerns regarding capital improvements associated with environmental regulations.

MWWD consists of two major systems - a municipal system providing sewage collection for City of San Diego (the city) residents and a metropolitan system, which provides sewage collection, treatment, and disposal services to the city and 15 member agencies. MWWD is exclusively owned and operated by the city while member agencies including 8 cities and 7 wastewater districts, participate under a 50-year, regional wastewater disposal agreement.

Over the past decade, MWWD has implemented nearly $1.8 billion in capital improvements; all but $300 million has been used to improve and expand the metropolitan system. Going forward, estimated capital improvement program appropriations total $1 billion through fiscal 2009 with the bulk of spending ($877 million) aimed at improving the municipal collection system. The municipal system is currently subject to an EPA administrative order, litigation from environmental groups, and city council actions intended to deal with concerns over sewer spills. An estimated $630 million of the capital plan is earmarked to help control and reduce these incidents. While MWWD's capital plan includes an accelerated improvement schedule to comply with the EPA order and settle with environmental groups, uncertainty remains regarding the ultimate scope and cost of these actions.

Also, while the metropolitan system's share of capital spending is less than in prior years, long-term uncertainty over potential costs of upgrading the Point Loma treatment facility remains. The Point Loma treatment facility, which accounts for more than 84% of MWWD's total permitted capacity, does not meet secondary wastewater treatment standards required under the Clean Water Act (CWA). However, pursuant to a five-year modified treatment waiver granted by the EPA, the facility will remain compliant through June 2008. MWWD's ability to obtain a renewal of its current modified waiver is unclear. Costs associated with bringing the Point Loma facility up to full secondary treatment could exceed $3.5 billion. Fitch's rating is based upon the assumption that the plant may continue to operate with waivers. Should a costly conversion to full secondary treatment be required, the projected increase in MWWD's capital program could negatively affect credit quality.

MWWD's financial performance has been favorable, with a strong cash position and healthy operating margins providing good annual debt service (ADS) coverage of senior lien debt during fiscal years 1998-2002 ranging from 1.5 times (x) to 2.1x. Estimated senior lien coverage for the fiscal year ending 2003 is closer to the rate covenant at 1.3x. With the current issue, a portion of senior lien debt will be refunded with subordinate lien bonds. As a result of this refunding, and due to future subordinate lien debt issuance associated with the CIP and adopted rate increases, senior ADS coverage is expected to rise quickly again in fiscal 2004 to 1.6x then above 2x through 2008. During the same period combined senior and subordinate ADS is expected at 1.2x in fiscal 2004, rising to 1.3x and above thereafter through 2008. MWWD's strong cash position along with its $45 million rate stabilization fund should provide adequate additional cushion.

Rate covenants are adequate including a 1.2x net revenue pledge for senior lien bonds and 1x for subordinate lien bonds; additional bonds tests are 1.2x maximum annual debt services (MADS) and 1x MADS, respectively.