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Rating Action:

MOODY'S ASSIGNS A2.mx ISSUER RATING TO THE SISTEMA INTERMUNICIPAL PARA LOS SERVICIOS DE AGUA POTABLE Y ALCANTARILLADO (SIAPA)

01 Jul 2003
MOODY'S ASSIGNS A2.mx ISSUER RATING TO THE SISTEMA INTERMUNICIPAL PARA LOS SERVICIOS DE AGUA POTABLE Y ALCANTARILLADO (SIAPA)

New York, July 01, 2003 -- Moody's has assigned A2.mx (Mexico National Scale Rating) and Ba2 (Global Scale, Local Currency) issuer ratings to the Sistema Intermunicipal para los Servicios de Agua Potable y Alcantarillado (SIAPA). The ratings reflect the system's economically strong and growing service area, consisting of the four-city Guadalajara metropolitan area; notable improvement in SIAPA's financial situation over the last five years and the expectation that sound financial operations will be maintained; and a positive trend in the entity's debt profile, including a reduction in debt ratios and a significant increase in the coverage of debt service by system net revenues.

SIAPA plans to fund its regular capital plan with its own revenues and not with borrowing. The system could incur additional debt for large scale capital projects, and the positive changes of recent years should allow it to cover the associated costs without a significant burden on its operations. Recent changes in SIAPA's legal framework, involving its transformation from a state to an intermunicipal system, may increase its rate-setting autonomy in the future, but such a development is still uncertain.

SIAPA, the second largest municipal water system in Mexico, provides water and sewer services to the inhabitants of the Guadalajara metropolitan area. Its strength as a service provider is derived in part from the area's growing and diversified economic base, which involves the municipalities of Guadalajara, Zapopan, Tlaquepaque, and Tonala. The city of Guadalajara has a large industrial core and the surrounding area is continuing to grow at a fast pace, especially in the areas of Zapopan (rated Aa3.mx by Moodys) and Tonala (rated A3.mx by Moodys).

SIAPA provides potable water to 93% and sewer service to 89% of the Guadalajara metropolitan area population. Reflecting current trends, SIAPA should experience steady growth in its commercial and residential customer base over the medium term. The system's current water supply is sufficient to meet demand over the medium term, and planning is under way for construction of another dam to assure that long-term water needs of SIAPA are met.

In May 2002 the Jalisco state congress approved the dissolution of the SIAPA de la Zona Metropolitana as a state entity and the creation of the new SIAPA, a public intermunicipal entity, under an agreement involving the municipalities of the Guadalajara metropolitan area. The Board of Directors of the new SIAPA is comprised of two representatives from each of the four member cities, and three from the Jalisco state government. The new SIAPA gained the authority to approve its own expenditure budget and capital plan, but did not gain autonomy in rate setting. Although SIAPA collects its water fees directly from users, water rates are a part of each municipality's revenue budget, for which approval by the state congress is required. These changes in legal structure, while positive, still limit the scope of the entity's decision-making power.

In earlier years, SIAPA's ability to achieve a sound financial position was challenged by the inadequate increases in water fees it was allowed and the relatively low collection rates it realized, due to its inability to impose consequences on non-paying users. In the last five years, however, SIAPA has reported an improving financial trend that is expected to continue.

The system's revenue picture has been improving steadily, with total revenues nearly doubling from Ps.760 million in 1998 to Ps.1.5 billion in 2002. The increase has been driven by a change to metered water service from fixed rates (74% metered in 1998 compared to 88% in 2003), an increase in collection of sewer fees and, most recently, the introduction of new user fees for infrastructure maintenance and sewage treatment. Financial results have shifted from a deficit of almost 30% of revenue in 1998 to a surplus of 10% in 2002. Conservatively cast pro forma estimates indicate that SIAPA should be able to maintain healthy finances with reasonable increases in user fees. SIAPA retains a high level of flexibility through its planned capital expenditures for the year, which could be curtailed in the event of a revenue shortfall.

SIAPA's debt profile has improved notably in the last six years with increases in its revenues, refinancing of its debt to UDIs in the mid-1990s and, more recently, successful efforts to reduce the interest rates charged for some of its outstanding credits. The debt service share of expenditures has improved significantly, dropping from 40% in 1998 to 17% last year. Coverage of debt service by net revenues before depreciation was a strong 3.5x in 2002.

If SIAPA participates with the state in the construction of six planned sewage treatment plants, its debt load would increase. Given its current ability to generate net revenues to cover debt service, the likelihood of future revenue growth and the new debt level that is being discussed, the increased debt level could be managed.

Moody's Mexico National Scale ratings are opinions of the relative creditworthiness of issuers and issues within Mexico. The Moody's Global Scale rating for borrowings in local currency allows investors to compare this issuer to all other issuers in the world rather than merely in Mexico. It incorporates all Mexico-related risks, including the potential volatility of the Mexican economy. For comparative purposes, Moody's Global Scale, Local Currency rating for domestic debt issued by the Mexican government is Baa1.

New York
Yves Lemay
Senior Vice President
International Subsovereigns Grou
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Dallas
Laura Barrientos
VP - Senior Credit Officer
International Subsovereigns Grou

No Related Data.
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