Fitch Upgrades New Orleans Sewerage Board Bonds to BBB

Fitch Ratings said it upgrades to BBB from BBB-minus the ratings on the following New Orleans utility bonds issued on behalf of the New Orleans Sewerage and Water Board: $148.5 million sewerage service revenue bonds; and $30.1 million water system revenue bonds.

The rating on the Board's $17.7 million drainage system limited tax bonds is affirmed at A-minus.

The rating outlook for all three ratings is stable.

The sewerage service revenue bonds are secured by a net pledge of revenues of the board's sewer utility system. The water revenue bonds are secured by a net pledge of revenues of the board's water utility system. The drainage system bonds are payable from and secured by a limited ad valorem tax.

The rating upgrades reflect a recently adopted rate package that provides needed rate increases for the water and sewer systems for the next eight years. The additional revenues should support prudent operating levels and begin to fund the most critical of a large array of capital needs while generating stable financial margins for bondholders and improving liquidity levels.

Each of the three systems - water, sewer, and drainage - exhibit adequate albeit still modest financial margins. The rate increases should provide a minimum of 1.5x coverage of revenue bonds, including anticipated new debt.

Liquidity remains low although additional revenues should help to restore liquidity levels to the Board policy of 180 days operating cash for each system over time.

Despite adequate margins, all three systems continue to face pressure given the scope of projected capital investment and expected operating cost increases. Maintenance of adequate margins will require management of expenditures within the revenue increases already established since additional rate increases beyond the approved levels is unlikely.

Capital needs for all three systems are extremely large following decades of deferred investment prior to Hurricane Katrina in 2005 in addition to repairs needed after the hurricane. The task of funding the needed improvements will remain daunting for an extended period.

Board management has worked over the past few years to achieve quick and high quality disclosure of financial information. Financial planning is viewed by Fitch as prudent.

The A-minus rating on the drainage system bonds reflects continued stable property tax collections which provide bond security, satisfactory operations, a manageable amount of debt currently outstanding, and moderate, steady growth in the tax base. This rating is unaffected by the rate increases to the other systems.

Economic recovery from the recession as well as Katrina and the 2010 Gulf of Mexico oil spill continues, as evidenced by increasing customer connections, gains in sales tax revenues, slight gains in employment, and a decline in the unemployment rate.

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