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MOODY'S ASSIGNS A Aa3 RATING TO THE METROPOLITAN GOVERNMENT OF NASHVILLE AND DAVIDSON COUNTY'S (TN) $109.53 MILLION WATER AND SEWER REVENUE REFUNDING BONDS SERIES 2010A, $160 MILLION WATER AND SEWER REVENUE BONDS, SERIES 2010B (BUILD AMERICA BONDS), $75 M

29 Nov 2010

Water/Sewer
TN

Moody's Rating

ISSUE

RATING

Water and Sewer Revenue Refunding Bonds, Series 2010A

Aa3

  Sale Amount

$109,530,000

  Expected Sale Date

11/30/10

  Rating Description

Revenue

 

Water and Sewer Revenue Bonds, Series 2010B (Build America Bonds)

Aa3

  Sale Amount

$160,000,000

  Expected Sale Date

11/30/10

  Rating Description

Revenue

 

Water and Sewer Revenue Bonds, Series 2010C (Recovery Zone Economic Development Bonds)

Aa3

  Sale Amount

$75,000,000

  Expected Sale Date

11/30/10

  Rating Description

Revenue

 

Water and Sewer Revenue Refunding Bonds, Series 2010D

Aa3

  Sale Amount

$7,950,000

  Expected Sale Date

11/30/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Nov 29, 2010 -- Moody's Investors Service has assigned an Aa3 underlying rating and negative outlook to the Metropolitan Government of Nashville and Davidson County's (TN) $109.53 million Water and Sewer Revenue Refunding Bonds, Series 2010A, $160 million Water and Sewer Revenue Bonds, Series 2010B (Build America Bonds), $75 million Water and Sewer Revenue Bonds, Series 2010C (Recovery Zone Economic Development Bonds) and $7.95 million Water and Sewer Revenue Refunding Bonds, Series 2010D. Concurrently, Moody's has also affirmed the Aa2 rating and negative outlook on Metro's $433.51 million in senior lien gross revenue debt. Proceeds from the Series 2010A and Series 2010D bonds will refund the system's outstanding Series 2002 bonds for an expected net present value savings of 9.39% of refunded principal as well as provide funding for the Debt Service Reserve Fund. Proceeds from the Series 2010B bonds are expected to be offered as Build America Bonds (35% federal subsidy) and will refund the system's outstanding $60 million in commercial paper, provide funding for the Debt Service Reserve Fund and various system improvement projects. Proceeds from the Series 2010C bonds are expected to be offered as Recovery Zone Economic Development Bonds (45% federal subsidy) and will provide funding for the Debt Service Reserve Fund and various system improvement projects.

RATING RATIONALE

The Aa2 senior lien rating reflects adequate legal provisions, the system's large, diverse customer base, stable financial operations with satisfactory coverage levels and a moderate debt ratio that will likely increase in the coming years as Metro finances both its five-year capital plan as well as costs related to an outstanding consent decree. The Aa3 subordinate lien rating reflects an updated resolution providing satisfactory legal protections for bond holders with debt service subordinate to all outstanding senior bonds. The negative outlook reflects significant damage to Metro Nashville and Davidson County's water and sewer facilities due to severe flooding on May 1 and 2, 2010, which could place a near-term strain on system revenues.

SATISFACTORY LEGAL PROTECTIONS FOR BONDHOLDERS

Metro's management decided to close the senior lien indenture in order to update and improve the legal structure of the new resolution, under which bonds will be issued as a subordinate lien until all senior lien debt matures in 2022. Moody's believes the legal provisions as outlined in the General Resolution provide adequate protection to bondholders. The system is a closed loop and includes a rate covenant sufficient to produce net revenues in each fiscal year at least equal to the greater of (1) 120% of the sum of (a) debt service on outstanding bonds, and (b) scheduled debt service on the prior bonds, all for such fiscal year, or (2) 100% of total debt and revenue requirements. Bondholders also benefit from a Debt Service Reserve Fund sized at maximum annual debt service. Additional debt may be issued if net revenues for any 12 consecutive months within the 24 consecutive months immediately preceding the date of issuance of additional bonds and stating that the net revenues for such 12 month period were at least equal to 120% of the MADS on outstanding bonds and the proposed bonds and scheduled debt service on the prior bonds in any future fiscal year.

WATER/SEWER SYSTEM SERVES LARGE, MODERATELY GROWING CUSTOMER BASE

The water and sewer enterprise system serves the majority of Metropolitan Nashville and Davidson County (G.O. rated Aa1/negative outlook), a service area with an estimated population of 596,462, as well as small portions of the counties surrounding Metropolitan Nashville. Over 99% of the system's 173,863 water customers are located within Metro's borders, and that base has been growing an average of 1.34% over the past five years. The sewer system serves 166,054 customers, with approximately 90% residing in Metro Nashville and roughly 10% in other counties; sewer system customer growth has averaged 1.22% over the past five years. For both the water and sewer system, the growth has mostly been in the residential customer base, driven by Metro's ongoing population growth of recent years, and officials expect the growth to continue going forward. Metro's (Davidson County) per capita and median family incomes are above average, measuring approximately 113.5% and 111.3% of the state levels. Full value per capita is an above average $107,139.

The system draws water from the Cumberland River, without restriction on amount, and maintains two treatment facilities that provide 180 MGD in capacity. Average demand for 2010 was 94 MGD and peak demand was 108.2 MGD, allowing for considerable capacity for continued demand growth. The sewer system effectively consists of three treatment plants for a total capacity of 392 MGD versus average treatment of 166 MGD, again allowing for capacity to accommodate customer growth. Water sales have, on average, grown approximately 1.63% over the past five years, although there have been years where water use has declined due to weather conditions. Average growth in sewer treatments has been modest, averaging 1.15% over the same five years, however the system experienced some declines in 2006 and 2007; officials indicate that this is largely due to success of their Overflow Abatement Program (OAP) which has reduced the amount of inflow/infiltration over the years, resulting in improved efficiency of the system. The OAP program was developed after a 1990 order issued by the Tennessee Department of Environment and Conservation (TDEC) identified problems regarding Metro's wastewater treatment, including the discharge of improperly treated wastewater into waterways, and required Metro to correct the problems. The OAP program reduced overflow from 68.9MG/100 miles of sewer pipe in 1990 to less than 7.73MG/100 miles of pipe in 2010. In 2005, Metro received an inquiry from the U.S. EPA about the system's operations, capital plan and stormwater management. In 2006, the TDEC and U.S. EPA agreed on a recommended consent decree to address and correct deficiencies within Metro's sewer system that have caused violations of the Clean Water Act. Since that time, the consent decree has been finalized, however on May 14, 2010, Metro petitioned the EPA and TDEC for a time extension of the delivery of their corrective action plan (CAP) and long term control plan (LTCP) due to the extreme flooding experienced earlier in May 2010. An extension has been granted with a deadline of submittal of September 12, 2011 and a deadline for final compliance of 11 years from the date of final approval of the plans. While Metro has not calculated the exact costs of the consent decree, estimates are currently around $1.0 billion over the next 10-12 years.

FINANCIAL POSITION EXPECTED TO REMAIN STABLE OVER THE NEAR TERM

Moody's expects the system to maintain satisfactory financial operations given relatively stable senior lien coverage levels and solid working capital levels. Coverage of senior lien debt service by net revenues has averaged 1.60 times over the past five years, and was 1.39 times for fiscal 2009 and 1.45 times in fiscal 2010 ( unaudited). Coverage of all debt by net revenues was 1.39 times in fiscal 2009, down from 1.56 times in fiscal 2005. Coverage of senior lien maximum annual debt service (MADS) was 1.69 times in fiscal 2009, given that debt service peaked in fiscal 2009.

Metro Council has sole rate-setting authority and rate increases for both the water and sewer systems have been instituted for 2010 (water 5%, sewer 9%), 2011 (water 5%, sewer 8%), and 2012 (water 5%,sewer 7%), boosting projected debt service coverage beginning in 2011. Senior lien debt service coverage by net revenues is projected to be 1.76 times in 2011, while subordinate debt service coverage is projected at 1.59 times. Overall debt service coverage, including senior, subordinate and SRF debt, in fiscal 2011 is projected at 1.25 times. Coverage levels are expected to continue to rise through 2011 in line with the rate increases, however senior lien debt will have largely matured by 2016, at which time overall debt service levels begin to drop. Although the system's net working capital levels have been reduced from their high of 275.5% in fiscal 2004 as construction funds have been spent, it remained a comfortable 159.5% of operating expenses at the end of fiscal 2009.

The system is required to make an annual PILOT payment to Metro's General Fund of $4 million. The system also makes annual transfers based on a Local Cost Allocation Plan (LOCAP) by which central service costs are distributed across departments. Overall transfers out have increased over the past few years, driven by growth in pension payments. Officials expect total transfers to be in the $12 to $15 million range going forward, although that could increase due to continued growth in pension contributions. The system's operating ratio has grown only modestly, from 44.7% in fiscal 2003 to 50.0% in fiscal 2009.

MANAGEABLE DEBT POSITION EXPECTED TO GROW OVER NEXT FEW YEARS

Moody's expects the system's manageable debt position to grow over the next few years as new debt is issued to help finance the significant capital improvement plan and consent decree. The system's debt ratio was a manageable 29.0% in fiscal 2009, close to the median for combined water and sewer systems. After the current financing, the pro-forma debt ratio is expected to increase to 40.4% (fiscal 2011). The five-year capital plan calls for between $600-$650 million in improvements to the water and wastewater systems. Additional debt is expected over the next ten years given consent decree projects that are estimated to equal approximately $1.0 billion in total. While Moody's expects this additional debt to increase the debt ratio further, the average rate of principal repayment of 51.6% in ten years should mitigate the additional debt somewhat.

KEY STATISTICS:

Type of system: Water supply, treatment and distribution; sewage collection, treatment and disposal

Pledge: Subordinate Lien - Net system revenues

Service area: Metropolitan Nashville/Davidson County

Number of system customers: Water, 173,863; Sewer, 166,054

1999 Metro Nashville per capita income as % of state: 119%

1999 Metro Nashville median family income as % of state: 113%

Operating ratio, FY09: 50.0%

Senior lien debt service coverage, FY09: 1.39x

Maximum senior lien annual debt service coverage, FY09: 1.69x

Debt ratio, FY09: 29.0%

Net working capital as a % of FY09 operations: 159.5%

Post-sale senior lien debt outstanding: $281.43 million

Post-sale subordinate lien debt outstanding: $351.24 million

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Outlook

Outlook

The negative outlook reflects significant damage to Metro Nashville and Davidson County's water and sewer facilities due to severe flooding on May 1 and 2, 2010, which could place a near-term strain on system revenues.

What could make the rating go UP:

- Increase in net revenues or reduction in debt service expenditures leading to significantly increased coverage levels

- Substantial growth in unrestricted cash reserves

What could make the rating go DOWN:

- Increase in debt service due to additional issuance without appropriate revenue enhancements to maintain current coverage levels

- Significant draws on working capital or unrestricted cash reserves

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Christopher Coviello
Analyst
Public Finance Group
Moody's Investors Service

Robert Weber
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A Aa3 RATING TO THE METROPOLITAN GOVERNMENT OF NASHVILLE AND DAVIDSON COUNTY'S (TN) $109.53 MILLION WATER AND SEWER REVENUE REFUNDING BONDS SERIES 2010A, $160 MILLION WATER AND SEWER REVENUE BONDS, SERIES 2010B (BUILD AMERICA BONDS), $75 M
No Related Data.
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