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MOODY'S ASSIGNS A1 RATING TO THE CITY OF MOORHEAD'S (MN) $10.34 MILLION TAXABLE PUBLIC UTILITY REVENUE BONDS, SERIES 2010C

24 Sep 2010

AFFIRMATION OF A1 RATING APPLIES TO $28 MILLION OF OUTSTANDING UTILITY REVENUE BONDS

Moorhead (City of) MN Combined Utility Ent.
Combined Utilities
MN

Moody's Rating

ISSUE

RATING

Taxable Public Utility Revenue Bonds, Series 2010C

A1

  Sale Amount

$10,340,000

  Expected Sale Date

09/27/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Sep 24, 2010 -- Moody's Investors Service has assigned an A1 rating to the City of Moorhead's (MN) $10.34 million Public Utility Revenue Bonds, Series 2010C. Concurrently, Moody's has affirmed the A1 rating on the city's parity debt, which is secured by a senior lien on the net revenues of the combined electric and water utilities. Post sale, the city will have $28 million of senior lien utility revenue debt. Moody's has also affirmed the A2 rating on the city's outstanding $1 million junior lien utility revenue debt and the Aa3 rating on the city's outstanding general obligation debt, affecting $173 million.

RATINGS RATIONALE

Debt service on the Series 2010C bonds is secured by a senior lien on the net revenues of the combined electric and water utilities. The majority of the proceeds will be used for capital improvements to the electric utility. Improvements include replacing existing generation capacity and substation and transmission improvements. Assignment and affirmation of the A1 rating reflect the system's moderately-sized customer base in the Fargo, North Dakota (GO rated Aa1) metropolitan area, rate setting authority that provides for ample debt service coverage and substantial annual transfers to city funds, narrow but improving cash position of the utility funds, debt levels that are expected to remain affordable, and standard legal covenants.

SYSTEM SERVES MODERATELY-SIZED CUSTOMER BASE IN FARGO METROPOLITAN AREA

The City of Moorhead's combined utility provides electricity and water services to a moderately-sized customer base. The utility serves 16,944 electric customers and 11,585 water customers. Over the past four years, the electric system's customer base has grown on average 5.4% while the water system customer bases has grown on average 3%, evidencing the growth of the system's service area. The electric component is the largest of the utility's two divisions, representing over 80% of operating revenues in fiscal 2009. The electric utility purchases all of its required power from two sources: the Western Area Power Administration (WAPA) through a take and pay contract that expires in 2020, and the Missouri River Energy Services (MRES) through a take and pay contract that expires in 2046. As the system's service area has grown, the proportion of the utility's power that is purchased from WAPA has decreased (56% in 2004 vs. 54% in 2009) while the proportion purchased from MRES has increased (44% in 2005 vs. 46% in 2009). The electric system also generates power through two 750KW wind turbines, which it sells to MRES. The utility also leases diesel fuel powered generators to MRES for the production of standby power, of which a portion of the proceeds from this issuance ($5.2 million) will be used to replace those existing generators with new generators. The majority of the water system's supply comes from the Red River, of which officials report that no environmental issues exist with that source of water.

Located in northwestern Minnesota adjacent to the City of Fargo, Moorhead's local economy is modest but stable. The broad economic recession has had a relatively modest impact on the Fargo-Moorhead area. The metropolitan area serves as a regional center for surrounding agricultural communities in Minnesota (GO rated Aa1, stable outlook) and North Dakota (issuer rated Aa1, stable outlook). Underpinning this regional role, the metropolitan area has a diverse economic base that includes significant healthcare, education, retail, and information technology sectors. City officials report stable operations at the city's top two property taxpayers: American Crystal Sugar (P-2/stable outlook) and Anheuser-Busch InBev (senior unsecured rated Baa2/positive outlook). Minnesota State University at Moorhead and Concordia College are both located in the city, which provides a measure of institutional stability to the economy. Approximately 12,000 students are enrolled at the schools, which accounts in part for the city's low income levels. Although Moorhead's unemployment rate has crept up during the past year, it remains well below those of the state and nation.

In the spring of 2009, the Fargo-Moorhead community endured unusually high water levels with the Red River. The river crested at a record 40 feet in late March and crested again at 34 feet in mid April. Favorably, significant damage did not occur, although both the City of Moorhead and the Moorhead Public Service utility incurred costs associated with flood protection efforts. In fiscal 2009, the city received federal and state reimbursement for approximately 90% of the $4.5 million in expenditures associated with the flood. The city has not experienced significant flooding in 2010 to date.

RATE SETTING AUTHORITY PROVIDES FOR AMPLE DEBT SERVICE COVERAGE AND SUBSTANTIAL ANNUAL TRANSFERS TO CITY FUNDS; NARROW BUT IMPROVING CASH POSITION OF UTILITY FUNDS

Due to the Moorhead Public Service Commission's willingness and ability to regularly increase electric and water rates, as well as utility management's practice of multi-year financial planning, we expect the system to continue its trend of satisfactory financial operations. The utility consistently posts healthy annual net revenues. In fiscal 2009, net revenues equaled $12.8 million, and the net take down equaled 34%. Despite the combined utility's profitability, both cash and net working capital in the utility funds are narrow. The system's fiscal 2009 unrestricted cash equaled $3.9 million, or 10.4% of 2009 operating revenues. Favorably, in October 2008, a formal policy was adopted to increase cash reserves to between 15% and 20% of electric operating revenues and 20% to 25% of water and broadband operating revenues. The system's net working capital has been consistently increasing the past five years, due to the planned cash increases and an accounting change related to accounts receivables. We believe the system's successful implementation of its cash reserve policy and the maintenance of stronger working capital levels are crucial to sustaining current credit quality.

The utility fund's narrow cash position reflects the utility's sizeable annual transfers to city funds. Moorhead's city charter allows a maximum of 25% of annual gross electric system revenues to be transferred to city funds (a maximum of 20% to the General Fund and 5% to the Capital Improvement Fund). The city charter also allows a maximum of 10% of annual gross water system revenues to be transferred to city funds (a maximum of 5% to the General Fund and 5% to the Capital Improvement Fund). State law also allows a maximum of $50,000 to be transferred annually from the electric utility to the city's Economic Development Fund. The Moorhead city council determines annual transfer amounts within the allowable limits. Transfers to city funds are subordinate to debt service on the senior lien bonds.

The Public Service Commission sets annual rates needed to cover debt service and transfers to city funds. Electric rates increased by 10% in January 2008, 12% in January 2009, and 4% in January 2010 while water rates increased by 12.5% in January 2008, 5% in January 2009, and no increase in January 2010. The 2009 rates provided a strong 3.3 times maximum annual debt service coverage on all utility debt that is currently outstanding. We note that the city's General Fund is very dependent on transfers from the utility, as transfers represented 37% of General Fund revenues in fiscal 2009. These transfers have provided for the accumulation of significant General Fund reserves: the fiscal 2009 General Fund balance equaled a very ample 77% of General Fund revenues.

We believe that the combined utility will continue to provide strong debt service coverage and General Fund support, while augmenting its own cash reserves, due to management's continued attention to annual water and electric rate increases to fund these objectives. Although the Public Service Commission has ultimate rate setting authority, and the city council determines the amount of the annual transfers to city funds, the potential for conflict between the two bodies is mitigated by the fact that the council appoints the members of the commission.

DEBT LEVELS EXPECTED TO REMAIN AFFORDABLE

With moderate plans for future borrowing, we believe that the utility's debt ratio will remain affordable. The utility has $28 million in outstanding senior lien debt, including the current issue, and $29 million in outstanding debt overall. The majority of the proceeds of the current issue will finance various improvements to the electric utility, including the replacement of generators, which will be leased to MRES for generation of standby power. Including the current issue, the system's debt ratio is a manageable 22%. Officials report that no significant environmental or regulatory issues exist. The utility's multi-year forecast projects additional borrowing of approximately $7 million for electric system improvements in 2012 that will also be partially funded with this issuance. All of Moorhead's outstanding debt is in fixed rate mode, and the neither the city nor the utility is a party to any interest rate swap agreements.

STANDARD LEGAL COVENANTS

We believe that the legal provisions for the current bonds should provide adequate security for bondholders. Debt service on the system's outstanding senior lien bonds, including the current issue, is secured by a senior lien on the net revenues of the combined electric and water utilities. Debt service on the outstanding junior lien bonds is paid from the utility's annual transfer of 5% of the gross receipts of the electric and water utilities to the city's Capital Improvement Fund; this transfer is subordinate to debt service on the senior lien bonds, as are annual transfers to the city's General Fund and Economic Development Fund. A rate covenant calls for net revenues that provide at least 1.25 times average annual debt service coverage on all senior lien bonds, including the current issue, and 1.0 times average annual debt service coverage on subordinate debt. An additional bonds test calls for net revenues in the preceding two fiscal years to equal 1.25 times the maximum annual debt service due on all outstanding and additional senior lien bonds, as well as 1.0 times the maximum annual debt service due on all outstanding and additional senior lien and subordinate bonds. The debt service reserve requirement equals the lesser of maximum annual debt service on the senior lien bonds or 10% of the original principal amount of the senior lien bonds.

WHAT COULD MOVE THE RATING - UP

-Substantial improvement in debt service coverage

-Strengthened net working capital and liquidity

WHAT COULD MOVE THE RATING - DOWN

-Deterioration in annual debt service coverage below similarly rated enterprises

-Significant leveraging of net revenues above affordable levels

KEY STATISTICS FOR MOORHEAD PUBLIC SERVICE

Type of system: combined utility (electric and water)

2009 customers: 16,944 (electric); 11,585 (water)

Fiscal 2009 Operating ratio: 66%

Fiscal 2009 Net take down: 34%

Fiscal 2009 Debt ratio: 22%

Post-sale utility debt outstanding: $28 million (senior lien); $29 million (all debt)

Fiscal 2009 MADS coverage: 3.3x

Rate covenant: 1.25x (senior lien); 1.0x (subordinate lien)

Additional bonds test: 1.25x MADS (senior lien) and 1.0x MADS (all debt); applies to prior two fiscal years

Debt service reserve requirement: lesser of 1.0x MADS (senior lien) or 10% of par (senior lien)

KEY STATISTICS FOR CITY OF MOORHEAD

2000 census population: 32,177 (a 0.4% decrease from 1990)

2009 full value: $2.1 billion

2007 full value per capita: $57,554

1999 per capita income: $17,150 (79% of US)

1999 median family income: $49,118 (98% of US)

City of Moorhead unemployment rate: 4.3% (July 2010)

The principal methodology used in rating the City of Moorhead, MN was U.S. Public Power Electric Utilities rating methodology published in August 1999. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

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

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

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

David Horton
Analyst
Public Finance Group
Moody's Investors Service

Rachel Cortez
Backup Analyst
Public Finance Group
Moody's Investors Service

Henrietta Chang
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 A1 RATING TO THE CITY OF MOORHEAD'S (MN) $10.34 MILLION TAXABLE PUBLIC UTILITY REVENUE BONDS, SERIES 2010C
No Related Data.
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