New Orleans Sewer Bonds Affirmed At `A-' By Fitch IBCA.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 6, 2000

Fitch IBCA affirms its underlying `A-' ratings on New Orleans, LA's $53 million outstanding sewerage service revenue bonds, series 1997 and 1998, and assigns an `A-' rating to the approximately $27 million planned sewerage service revenue bonds, series 2000. The series 2000 bonds are expected to be sold competitively, via sealed bids to the city's board of liquidation expected to be received until 10 am, central daylight time, on April 12. In addition, Fitch IBCA has affirmed its underlying `A-' ratings on $21 million outstanding New Orleans water revenue bonds, series 1986 and 1998.

Following its 1998 judicial settlement with the U.S. Environmental Protection Agency (EPA), the New Orleans Sewerage and Water Board's sewerage system has begun what promises to be an historic decade of renovation. Massive improvements throughout the century-old system are required to reduce pollutant flows into sensitive fresh water, wetland, and estuarial environments, including Lake Ponchartrain and the Mississippi River.

Cost forecasts for the mandatory consent decree program have risen and now total $455 million for the estimated 13- year effort, which is equal to 169% of 1998 system plant value. To date, compliance and financial performance have been superb, strengthened by above-average legal covenants with bondholders and notable belt-tightening by management, which has reduced staffing levels by 18%. In the near term, annual debt service coverage is projected to remain above 2 times (x) annually, and typical rates remain near average for similar utilities nationally, both on an absolute basis and relative to household income.

Last month, New Orleans city council acted on the board's two-year-old request to enact a major rate increase to support major initial phases of the consent decree effort. Council approved a 30% rate increase, compared to the board's 42% five-year increase proposal, following extended discussion of privatization and managed competition options, which is ongoing. Given the scale of the EPA- required effort, such deliberation is expected and healthy, but it does forebode tightening financial margins in outyears of the expensive capital effort. To complete the consent decree effort, additional rate increases will be needed, and while the board plans to consider increased managed competitive efforts for some services, its ability to cut costs substantially further remains uncertain. Positively, rate and additional bonds covenants are of above average strength, compared to similar systems nationally.

Fitch IBCA also rates the board's outstanding water revenue bonds `A-'. Water capital needs are not currently as urgent as those of the court-supervised sewerage system, and while water system finances also remain superb, a future renovation effort is probable there too.

While overall water and sewer rates remain affordable, they are now creeping above medians and averages for systems of comparable size. Income levels are below average, and employment levels in the area's oil and gas industries continue their historical volatility, although there are signs that long-term declines in city population are stabilizing. Tourism has been particularly strong, particularly with expansion of the local gaming industry.