Fitch has assigned an 'A-' rating to the Sewerage and Water Board of New Orleans, Louisiana (the board) $33 million sewerage service revenue bonds, series 2004 and an 'F1' rating to the board's $25.2 million sewerage service bond anticipation notes, series 2004 (BANs). The bonds and BANs are scheduled to be sold competitively on Dec. 2. In addition, Fitch affirms the 'A-' rating for the board's $173.4 million outstanding parity sewerage service revenue bonds, and the 'F1' rating for the $111.8 million sewerage service BANs outstanding. The Rating Outlook is Stable.

The bonds are secured by and payable solely from gross revenues of the sewer system (the system), including revenues received from the imposition of sewer charges. The BANs are payable from the proceeds of additional parity revenue bonds or the proceeds of additional bond anticipation notes, and also are secured by a subordinate pledge of net revenues of the system. Bond and BAN proceeds will be used to finance system improvements and to pay issuance costs.

The 'A-' long-term rating reflects positive operating results, satisfactory debt service coverage, and the approval and implementation of a series of rate increases to fund its sizeable capital improvement program (CIP). The 'F1' short-term rating reflects the ready market access traditionally realized for the board's offerings. One of Fitch's concerns regarding the magnitude of the capital program is mitigated to an extent by the approved rate hikes, which are projected to generate adequate coverage levels. Marginal system liquidity remains a credit risk.

The board, which operates and manages the sewer system, continues its large-scale CIP. Totaling $534.4 million for 2004-2008, the majority of the CIP is to be used to fund projects associated with a 1998 consent decree with the U.S. Environmental Protection Agency (EPA) over alleged violations of the Clean Water Act. The consent decree required the implementation of a 13-year renovation effort to prevent unauthorized discharges in the primary east-bank system, including peak flow discharges during wet weather periods. Construction is underway in various basins, including in the central business district and French Quarter. Officials report the system is in full compliance with all requirements of the consent decree.

Financial performance remains generally favorable, due primarily to cost reduction measures and the series of sewer rate increases. The system reported net income for four of the past five fiscal years, and debt service coverage, although lower in 2003 than prior years, has remained comfortably higher than the 1.30 times annual rate covenant requirement. Cash levels, which have been low in recent years, remained meager at the end of 2003 with only nine days worth of expenditures on hand.

To pay for the CIP projects, a 30% rate increase was implemented in March 2000, followed by an 8% increase in November 2001 and a 15% increase in December 2002. In August 2003 both the New Orleans city council and the board approved a series of additional rate hikes. The first 15% increase took effect in September 2003, followed by an additional 15% hike in July 2004; additional increases of roughly 15% are scheduled for 2005 and 2006. Despite the magnitude of recent increases, Fitch believes affordability for system customers is not currently an issue.

The wastewater system consists of two separate components, one serving the east bank of the Mississippi River (home to 89% of New Orleans residents) and the other serving the west bank. The number of system customers has fluctuated between 137,000-142,000 for the past five years.

The board was created by the state legislature in 1899 as a special agency independent of the New Orleans city council, to construct, maintain and operate the city's water and wastewater systems. The drainage system was added to the board's responsibilities in 1903. The board is legally independent of the City of New Orleans, which has no control over its activities and finances with the exception of approval of bond issues and certain rate increases.