Fitch Downgrades Leoni Township, Michigan's Sewer Bonds to 'A'; Outlook Stable

Business Wire, Jan 24, 2008

CHICAGO -- Fitch Ratings has downgraded Leoni Township, Michigan's (the township) $875,000 outstanding sewer disposal system revenue bonds, series 2000 to 'A' from 'A+'; The Rating Outlook is Stable.

The downgrade reflects the township sewer system's (system) weakened financial operations related to long-deferred rate increases, potential for greater than projected rate increases, and also environmental concerns resulting in the need for a new debt-financed wastewater treatment plant. Expenditures have nearly doubled since fiscal 2005 resulting in the sewer system falling below its 1.1 times (x) rate covenant in fiscal 2007 (year end June 30). While the township plans to increase rates in the near future, the future rate increases may be larger than projected to provide sufficient coverage for current and future debt. The Stable Rating Outlook reflects the township's ability to readily raise rates while keeping rates competitive to nearby sewer providers.

The system is located approximately 75 miles west of Detroit and provides sewer treatment to approximately 11,000 customers in the township and adjacent communities. In fiscal 2005, the Michigan Department of Environmental Quality (MDEQ) identified shortcomings in the management and water quality at the township's wastewater treatment plant, resulting in a consent order between the township and MDEQ. The township hired a private operator to improve operations at its wastewater treatment plant and also recently completed planning for construction of a new plant to improve treated wastewater quality.

The township's new wastewater treatment plant will be funded from $33.8 million in debt issued through the state's clean water revolving fund (rated 'AAA' by Fitch) later in 2008. In addition, the system currently supports $6.2 million in outstanding revenue debt.

Periodic rate increases will fund the new debt issuance, with projected rates increasing to $17.75 per month for a residential equivalent unit (reu) in fiscal 2026 from a current monthly rate of $14.50 per reu. The township has not increased its sewer rates since fiscal 1990. Fitch notes that future rate increases may need to be larger than projected to provide for sufficient coverage for currently outstanding debt and the township's planned future issuance. In addition, the projected rate increases assume more aggressive growth in the next five years of 5.6% on average annually, with substantially higher rate increases possible if growth does not materialize as expected. Neighboring sewer systems currently charge higher rates, which gives the township some flexibility in its ability to increase rates to higher than projected levels while maintaining affordability.

The system's operating expenditures increased to $2.2 million in fiscal 2007 from $1.2 million in fiscal 2005, with a significant portion related to planning for the new wastewater treatment plant. The increased expenditures eroded the system's coverage levels on outstanding debt, with coverage decreasing to 1.0x in fiscal 2007 from 2.8x in fiscal 2005 (including connections fees). While reserve levels remain high, the system's days cash on hand decreased substantially to 325 days in fiscal 2007 from 1,301 days in fiscal 2005. The township will receive a $1 million grant from the MDEQ to reimburse planning expenses related to the new treatment plant, which will help improve its financial reserves.

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