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MOODY'S ASSIGNS A2 RATING TO CITY OF MONROE'S (NC) $20 MILLION COMBINED ENTERPRISE SYSTEM REVENUE REFUNDING BONDS, SERIES 2011

06 Jun 2011

$52.8 MILLION OF PARITY DEBT AFFECTED

Monroe (City of) NC Combined Utility Ent.
Combined Utilities
NC

Moody's Rating

ISSUE

RATING

Combined Enterprise System Revenue Refunding Bonds

A2

  Sale Amount

$20,015,000

  Expected Sale Date

06/15/11

  Rating Description

Combined Enterprise System

 

Opinion

NEW YORK, Jun 6, 2011 -- Moody's Investors Service has assigned an A2 rating to the City of Monroe's (NC) $20 million Combined Enterprise System Revenue Refunding Bonds, Series 2011. At this time, we have also affirmed the A2 rating on the system's $51 million in pre-refunding parity debt outstanding. The bonds are secured by the net revenues of the combined enterprise system, which include electric, gas, water, sewer and airport enterprises. The bonds will refund the system's Series 1998 and 2008B bonds for an estimated net present value savings in excess of 4.5% of refunding principal, with no extension of final maturity.

SUMMARY RATINGS RATIONALE

The A2 rating reflects a growing service area, in which population has increased by 45% since 2000, a sound financial position as reflected by a track record of strong coverage and a healthy cash position. The rating also incorporates the system's manageable debt burden.

STRENGTHS

-Demonstrated willingness to adjust rates to maintain sound fiscal margins

-Solid liquidity position

-Growing and relatively stable service area

-Healthy debt service coverage levels

CHALLENGES

-Elevated risk of revenue disruption given high level of ratepayer concentration

-Significant off-balance sheet debt of about $154 million associated with the generation ownership in the Catawba Project through North Carolina Municipal Power Agency 1

GROWING CHARLOTTE SUBURB; CONCENTRATION IN TOP PAYERS

The City of Monroe (Aa3 appropriation-backed debt rating) is the county seat of growing Union County (GO rated Aa1) and benefits from proximity to Charlotte (GO rated Aaa). The city's population grew by more than 60% in the 2000 census (from 1990) and 2010 figures show additional 45% growth since 2000, bringing the population to 32,000. Population and customer growth have slowed over the last three years, largely reflecting economic conditions. Looking ahead, the system projects customer growth of approximately 2%, which seems reasonable given the slow pace of the economic recovery. The systems each have approximately 10,000 customers (the largest is water at 11,462 and the smallest is sewer with 9,959). Wealth levels in the city approximate the state and are slightly below the nation (median family income equaled 97% and 89.9% respectively).

While recent customer growth has been primarily driven by residential development, the system evidences concentration as reflected in the top ten ratepayers, which account for 33% and 40% of revenues in water and sewer, respectively, as well as in electric and gas where the top ten ratepayers represent 36% and 26%, respectively. Tyson Foods (senior unsecured debt rated Ba2 with a stable outlook) is a major customer for all systems and accounts for nearly 20% of water and sewer revenues. The sewer's high concentration is mitigated by the fact that approximately10% of revenues come from a contractual agreement with the county to treat waste from the county system. Other top ten customers include a variety of manufacturing concerns, including ATI Allvac, which is the largest electric system consumer responsible for 22% of revenues. The city reports that the presence of its two largest ratepayers, Tyson and ATI Allvac, are expected to remain stable in the community.

SYSTEM DISPLAYS ADEQUATE CAPACITY; DEMONSTRATED WILLINGNESS TO RAISE RATES

The system encompasses the city's electric, gas, water, sewer and airport enterprises. The electric enterprise represents the largest portion of revenues ($43 million or 57% of 2010 revenues). Approximately 99% of the city's power in 2010 was supplied by North Carolina Municipal Power Agency Number 1 (NCMPA 1, rated A2/stable outlook), a joint power authority, of which the city is a 10% member. The city, along with 18 other municipalities are members of NCMPA 1, which owns a 75% interest in a 1,145 MW nuclear power plant (Catawba Unit 2) in South Carolina operated by Duke Energy (rated senior unsecured debt rated Baa2/stable outlook). Under the city's Project Power Sales Agreement with NCMPA 1, it has agreed to take or pay for its share of project output, regardless of the status of plant operations. The agreement extends through 2033, the life of NCMPA 1 debt. NCMPA 1 has access to alternate power and energy supply through reliability exchanges, which are intended to mitigate potential adverse impacts from extended outages at Catawba Unit 2. Catawba's operating license was extended to 2043.

The natural gas enterprise, which accounts for 24% of revenues, had 10,203 customers in 2010 up 7.2% since 2006 and extending beyond the city limits. The city purchases gas via an agreement with Hess Energy (senior unsecured rated Baa2/stable) pursuant to which Hess manages the pipeline capacity contracts and arranges for all of the city's natural gas supplies. The city's current agreement with Hess runs through October 2012. The city recently completed a 43-mile high pressure transmission pipeline that directly connects to the Transcontinental Pipeline and will provide the city with significant capacity for future growth. Additionally, the city entered into an agreement with Public Service Company of NC to lease capacity, with payment defraying the cost of construction.

The water and sewer enterprises account for 16% of revenues, but significantly contribute to the bottom line, generating 37% of operating income in 2010. The sewer system collects, treats and disposes of sewage. It has adequate treatment capacity of 10.4 MGD as compared to the average demand of 6.77 MGD. In addition to treating city wastewater, the system provides treatment for some of the county's system, the revenue from which accounts for 10% of system revenues. Water is drawn from three reservoirs and has a safe yield of 10 MGD. Capacity is typically sufficient with an average demand of 5.8 MGD and peak 9.1 MGD. Through a contract with the county, the city has secured an additional water supply from the Catawba River WTP of 1.99 MGD, scheduled to become available in 2014. Current capacity of both the water and wastewater systems is expected to meet the city's needs through 2030, assuming 2% growth.

The airport, which is a designed overflow airport for the Charlotte Douglas Airport (revenue rated A1/positive outlook), accounts for less than 2% of system revenues. The airport, which had been operated by a private company until 2006, is home to 96 aircrafts and derives revenues primarily from fueling and rental hangar and tie down space. Since the municipality has been responsible for operations, the General Fund has subsidized operations ($740,000 in 2010), which is expected to continue over the near term.

The system has independent rate setting power for all of its enterprises and reviews all rates as a part of the annual budget process. Water and sewer rates have been increased on average 4.5% annually over the past several years. Electric rates were increased by 5% in 2011 and a 7% increase will go into effect for fiscal 2012. The gas enterprise has the ability to institute a gas purchase price adjustment, which allows the system to pass unexpected gas price increases along to customers - albeit with a fixed margin. The city's water, wastewater and electric rates are all competitive relative to other retail providers.

DEBT SERVICE COVERAGE EXPECTED TO REMAIN HEALTHY; STRONG LIQUIDITY

The system's A2 rating heavily factors the strong liquidity position and healthy coverage levels. Fiscal 2010 audited results indicate unrestricted cash of $70.6 million (a strong 95% of expenditures). Included in the unrestricted cash is $5.9 million of a rate stabilization fund in the electric enterprise. Audited fiscal 2010 debt service coverage (DSCR) of senior lien debt equaled 3.03 times however when netting out a one-time $6 million receipt of availability fees coverage declines to a still satisfactory 1.92 times. Total debt service coverage (also netting out availability fees), including subordinated debt (inclusive of the 2008 COPs) was1.45 times in 2010. Debt service coverage levels are expected to remain stable in fiscal 2011 with the potential for improvement in fiscal 2012 following the recently approved rate increases. The system's 2010 audited operating ratio of 89% was in line with the past two years while the net take-down (19.6%) showed slight improvement from the prior year (15%) .

In addition to standard performance metrics, Moody's also calculated a fixed charge debt service coverage ratio (DSCR), which treats JPA power purchases as debt service versus an operating expense. According to the fixed charge coverage calculation, Monroe's fixed charge DSCR was a lower 1.2 times in to 2010. This metric is expected to be flat in fiscal 2011. When looking at the fixed charge DSCR, we also adjust the days cash on hand figure to reflect the lower operating expenses that result from netting out the JPA expenses and moving them to the debt service line. This results in a higher days cash on hand metric. For Monroe, the adjusted days cash on hand figure, using the new operating expenses less JPA expenses, was an ample 826 days vs. the 384 days without the adjustment in 2010.

LEGAL PROVISIONS PROVIDE SATISFACTORY PROTECTION FOR BONDHOLDERS

The bonds are secured by the net revenues of the combined enterprise system. Legal provisions for bond holders also include a covenant to maintain rates sufficient to provide net revenues equal to 125% of senior lien debt service and 100% of all debt obligations. The additional bonds test requires that audited net income must be 125% of current and projected debt, or audited net revenues must be 125% of debt service and projections must indicate 135% of current and outstanding over next two years.

There is no debt service reserve fund (DSRF) requirement. Following this refunding only the system's Series 2008A bond will be additionally secured by a surety-funded DSRF with Assured Guaranty (senior unsecured Aa3/negative outlook). While we consider this a credit weakness the risks associated with the lack of a DSRF are tempered by the system's strong liquidity, as well as its ability to raise rates immediately by the vote of the city council, coupled with a demonstrated history of annual rate increases.

MANAGEABLE DEBT LEVELS

The system's debt position is expected to remain manageable. The systems currently low debt ratio (33%) may increase in future years, particularly given a planned upgrade to the wastewater treatment plant currently expected in 2019. The system is also taking on approximately $13 million of additional state revolving fund debt to expand its wastewater collection capacity. The system does not have any variable rate debt or derivative agreements outstanding.

WHAT COULD MOVE THE RATING UP:

-Sustained improvement of debt service coverage levels

-Strengthening of tax base and demographic profile to levels more consistent with higher rating categories

WHAT COULD MOVE THE RATING DOWN:

-Weakened debt service coverage

-Reduction of cash levels, particularly in light of the lack of debt service reserve fund

-Significant additional debt

-Loss of a major ratepayer which results in unplanned operational and fiscal disruption

KEY STATISTICS

2010 Operating ratio (unaudited): 89%

2009 Operating ratio: 89%

2010 Debt ratio: 33%

2010 Senior Debt Service Coverage: 3.03 x

2010 Senior Debt Service Coverage (net of availability fees): 1.92 x

2010 Fixed Charge Debt Service Coverage: 1.20 x

Post-closing Bonds Outstanding: $51.4 million

City of Monroe Median Family Income as a % of State (1999): 88.5% (83.2% of US)

City of Monroe Per Capita Income as a % of State (1999): 97% (89.9% of US)

The principal methodology used in this rating was U.S. Public Power Electric Utilities published in April 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public 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

Conor McEachern
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 A2 RATING TO CITY OF MONROE'S (NC) $20 MILLION COMBINED ENTERPRISE SYSTEM REVENUE REFUNDING BONDS, SERIES 2011
No Related Data.
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