Fitch Rts Anchorage, AK $20MM Water, $20.2MM Wastewater Bonds 'AA-'.

Business Editors

CHICAGO--(BUSINESS WIRE)--May 13, 2004

Fitch Ratings assigns a 'AA-' rating to the Municipality of Anchorage, Alaska's approximately $20 million water revenue and refunding bonds, series 2004 and $22.2 million wastewater revenue bonds, series 2004. Additionally, the 'AA-' rating is affirmed for the city's $62.5 million outstanding parity water system revenue bonds and $4.8 million wastewater system revenue bonds. The Rating Outlook is Stable.

The bonds are scheduled to sell on May 26 via negotiation through Citigroup Global Markets Inc. Bond proceeds will fund infrastructure improvements to the water and wastewater systems. A portion of the water system proceeds will be used to refund approximately $4.7 million in outstanding (Series 1993) water revenue bonds. The bonds are secured separately by the net revenues of the water and wastewater systems.

The 'AA-' rating reflects Anchorage Water and Wastewater Utility's (AWWU) stable and primarily residential service area, ample water supply, and sufficient treatment capacity to meet projected capital needs for the next several years. In addition, water and wastewater rates, which are primarily based on flat rate (non-metered) usage, are reasonable. With this rate structure, both systems have maintained stable financial performance as there is little impact due to changes in consumer demand.

Water and wastewater rates, however, increased 13.6% and 8.1% in 2004, respectively, in order to pay higher Municipal Utility Service Assessments (MUSA) to the primary municipal government. MUSA payments, which are made in lieu of property taxes, are based on the net plant value of water and wastewater system assets. In 2003, the methodology for calculating MUSA was modified to be consistent with the way in which property taxes are assessed or paid by the private sector. This change resulted in higher AWWU net plant values and an increased amount to be paid to the primary government. Proposed water and wastewater rate increases of 7.2% and 6.8% in 2005, respectively, should help absorb the impact of increased payments, which will be phased in over the next two years. MUSA obligations have a subordinate lien to all outstanding obligations for both systems.

The systems provide essential water and wastewater services to approximately one-third of Alaska's population. AWWU owns and operates a gravity-fed water system with deep aquifer wells and six large reservoirs, drawing from two surface water sources, and 17 deep-water wells. The utility also owns a wastewater system with three treatment facilities and nine pump stations. The systems have ample water supply and treatment capacity to meet projected demand for the next 20 years. In addition, AWWU is currently compliant with all governmental water and wastewater requirements.

Coverage levels are adequate for the water system at 1.7 times (x) in 2002 and unaudited 2003. Projected debt service coverage ranges from 1.7x - 1.9x over the next five years. Debt service coverage for wastewater is much stronger at 33.7x in 2002 and 30.9 in unaudited 2003. Projected wastewater coverage declines to 3.1x over the next five years due to future debt obligations used to fund the capital program.

AWWU's capital needs through 2009 are moderate at $146.3 million and $113.6 million for water and wastewater, respectively. The capital improvement programs primarily address general plant repair and improvements to the water utility's transmission facilities. On a combined basis, water and wastewater CIP funding will be derived from revenue bonds (57%), state revolving fund loans (33%) and governmental grants and operating revenue (10%). With the capital improvements, AWWU management expects that the water and waste water systems will meet community demand for the next 20 years.

Anchorage is the most populous city in Alaska and is the center of trade and commerce. Although the area depends heavily on the state's significant oil reserves, steady expansion of non-oil related industries, such as tourism and the air cargo industry, adds diversity to the city's economy. The city's unemployment rate (5.4% as of March 2004) is well below state and national averages. In addition, wealth levels are high with per capita income totaling 119% and 122% of state and national averages. Nevertheless, the area's higher cost of living somewhat offsets the higher incomes.