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Fitch Rates Detroit Water & Sewage $300MM Revs 'A+'

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  • James Grant
    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
    Message 1 of 1 , Jan 29, 2005
      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.

      Fitch Ratings
      Joseph O'Keefe, 312-368-3171 (Chicago)
      Kenneth Reed, 212-908-0540 (Media Relations, New York)

      Source: Fitch Ratings
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