Fitch Rates Detroit Water & Sewage $300MM Revs 'A+'
- Outlook To Stable
CHICAGO--(BUSINESS WIRE)--Jan. 28, 2005--Fitch Ratings has assigned an
'A+' rating to the City of Detroit, Michigan's $300 million water
supply system revenue senior lien bonds, series 2005-A, and affirmed
the rating on $1.2 billion of outstanding senior lien debt. Fitch also
affirms the 'A' rating on $499 million of outstanding second lien
bonds. The Rating Outlook has been revised to Stable from Negative. A
portion of the senior lien bonds will be structured as water supply
system revenue senior lien variable-rate demand bonds, series 2005-B,
and will carry an underlying rating of 'A+'. In addition, Fitch
expects to assign a long-term rating to the series 2005B bonds, based
on municipal bond insurance, and a short-term rating, based on a
stand-by bond purchase agreement provided by Dexia Credit Local,
acting through its New York agency.
The Rating Outlook revision to Stable reflects the combination of
better operations management and stronger financial performance. While
the Detroit water system has raised water rates at a strong pace in
recent years, weaker revenues and increased personnel expenditures
reduced debt service coverage below bond covenant requirements in the
2000-2002 fiscal periods (June 30 year-end). Subsequent efforts to
improve worker productivity, reduce dependence on contractual services
and promote more efficient resource use have restrained spending
growth. With rate increases focusing just on capital program needs in
fiscal 2006, customers will benefit from the lowest rate increase in
more than a decade. Although combined debt service coverage for senior
and second lien bonds declined to a low of 0.85 times (x) in fiscal
2001, coverage has improved gradually to 1.37x in fiscal 2004.
Similarly, senior lien debt service coverage improved from 0.93x in
fiscal 2001 to 2.04x in fiscal 2004. Capital budget initiatives to
meet regulatory requirements and address system infrastructure have
expanded borrowing needs in recent years, but rates are expected to
remain competitive on a national basis.
The water supply system ratings are based on the diverse and growing
service area, competitive operating position, ample system capacity,
and moderate financial flexibility due to its low user rates and
improving water quality. The system is regional and serves 43% of
Michigan's population, of which about 78% of demand consist of
wholesale customers. Successful operations management and an enhanced
capital program have supported gains in financial performance.
Additional user rate increases will be necessary to finance capital
initiatives and sustain present debt service coverage, but adequate
capacity, high water quality and full compliance with regulatory
standards provide financial flexibility.
The $1.1 billion capital improvement program (CIP) for 2005-2009
represents a sizable expansion of capital spending from the previous
decade and should significantly enhance the quality of the system's
infrastructure. The system is in regulatory compliance but must
continue its investment efforts to improve plant efficiency, water
distribution, and financial controls. Bond financing represents about
85% of the CIP's financing requirement; however, the system has some
flexibility since it meets all current Safe Drinking Water Act
regulations. With the completion of a new water treatment facility at
Water Works Park in 2003, the capital program will focus on the
rehabilitation of the distribution system within the city limits of
Detroit and increasing water metering of city and suburban customers.
Spending on plant replacement and renovation will concentrate on the
four remaining plants, including filter rehabilitation, chemical feed
systems, and sludge treatment.
Joseph O'Keefe, 312-368-3171 (Chicago)
Kenneth Reed, 212-908-0540 (Media Relations, New York)
Source: Fitch Ratings