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Rating Update:

MOODY'S ASSIGNS AN A1 RATING TO THE CITY OF ATHEN'S (AL) $14.23 MILLION WATER AND SEWER REVENUE WARRANTS, SERIES 2010

19 Nov 2010

AFFIRMATION OF THE A1 RATING AFFECTS APPROXIMATELY $16 MILLION IN PREVIOUSLY ISSUED PARITY DEBT

Athens (City of) AL
Water/Sewer
AL

Opinion

NEW YORK, Nov 19, 2010 -- Moody's Investors Service has assigned an A1 rating to the City of Athens (AL) $14.23 million Water & Sewer Revenue Warrants, Series 2010. Concurrently, Moody's has also affirmed the A1 rating on approximately $16 million in previously issued parity debt. The current issue is secured by the net revenues received by the city from the operation of the water and sewer systems.

RATING RATIONALE

The A1 rating reflects the system's solid operating ratios and expectation that the system's financial operations will continue to be well managed. The rating also reflects the system's growing Northern Alabama service area and proximity to Huntsville and moderate debt levels. Proceeds from the Series 2010 Warrants will advance refund the system's outstanding Series 2002 Warrants, providing an estimated net present value savings of 3.61% of refunded principal.

SECURITY PROVISIONS ARE ADEQUATE

Security provisions include a debt service reserve funded at maximum annual debt service, a rate covenant of 1.20 times annual debt service and an additional bonds test of 1.20 times of maximum annual debt service. The system operated under an open loop flow of funds, which enables the city to use excess water and sewer monies for other city purposes.

DIVERSE SERVICE AREA; ADEQUATE CAPACITY

The city's water and sewer systems serve a diverse service area in northern Alabama, mostly in the City of Athens (GOLT rated Aa2). The city benefits from the proximity of the City of Huntsville (GOLT rated Aaa), the major industrial, commercial, and research center in northern Alabama.

The system's customer base is diverse, with a large residential component, as the top ten customers comprise approximately 19.74% of total system operating revenue. Customer base growth has been steady, at approximately 1.39% annually since 2006. The city's water system serves most of the city and parts of Limestone County. Water system treatment capacity, at 13.5 MGD, is ample to meet average daily demand of 4.10 MGD and a peak demand of 8.90 MGD. Given the current and projected water demand, the system's water supply is more than sufficient, with a safe yield of 56 MGD from the Elk River. The city completed construction of a new wastewater treatment plant in 2010, with an operating permit of 9 MGD and designed maximum hydraulic capacity of 18.0 MGD. Although peak flow rates to the wastewater treatment plant can reach as high as 16.5 MGD, and average monthly flows during the winter can be as high as 8 MGD, the normal flow into the treatment plant is only about 4.5% MGD. As sewer replacement and leak repair programs continue successfully, the city expects that infiltration/inflow to reduce to levels such that the existing plant will have a growth capacity of 2.5 MGD or 5,000 more customers. The city is currently operating in full compliance with an existing Consent Order.

FINANCIAL OPERATIONS REMAIN STABLE

System financial operations are well-managed and are within industry medians. A fiscal 2009 operating ratio of 70.2% is above the industry median of 61.4% and a net take-down ratio of 35.0% is just below the median of 42.0%. Historical debt service coverage has ranged from 1.97x to 3.82x since 2005, and is projected to remain at current levels over the near term (3.08x unaudited fiscal 2010). Net working capital levels have remained fairly steady, ending at 150.2% of O&M at the end of fiscal 2009. An annual rate escalator of 2.5% (water) and 3.0% (sewer) was adopted in 2003 and the city council has sole rate-making authority. Additional rate increases for both systems in 2010 (water - 10% increase in Oct. 2010 & sewer - 10% increase in April 2010, 10% in Oct. 2010) were approved by the council in anticipation of covering normal operating expenses, as well as assisting with the financing of the new wastewater treatment plant. Rates are competitive with neighboring systems in northern Alabama. Given the annual rate escalator and flexibility of changing rates, Moody's believes the system will maintain favorable operating margins and provide ample coverage of debt service requirements going forward.

It is important to note that the enterprise has two SRF bonds (not rated) outstanding, a Series 2007 and Series 2008. Under the legal documents for these issues, the SRF bonds have a rate covenant of 1.2 times of maximum annual debt service, including the enterprise's revenue bonds Series 2002 and Series 2010 (senior lien to SRF debt). On a combined basis, maximum annual debt service coverage in fiscal 2010 (unaudited) was 1.06 times, violating the 1.2 times covenant. Because of the approved future rate increases (which will bring coverage back above the combined coverage requirement), management anticipates receiving a legal waiver for the covenant violation in fiscal 2010 from the Alabama Department of Environmental Management and Alabama Water Pollution Control Authority. While Moody's looks at the covenant violation of the SRF bonds as a credit negative, the combined coverage requirement does provide an added buffer for the senior lien Series 2002 and 2010 bonds by requiring rate increases to be sufficient to cover both the rated revenue debt, as well as the SRF debt. Moody's will continue to monitor the situation to make sure that all future coverage levels are consistent with projections, thereby meeting all required legal debt service requirements.

MODERATE DEBT LEVELS

Moody's believes the system's debt burden will remain manageable given regular rate increases and the lack of plans for new money debt over the near term. The system's debt ratio is slightly above-average at 53.1%, primarily the result of the construction of the new wastewater treatment plant (completed 2010). Payout is average with 39.7% of principal repaid within ten years and 94.8% repaid within 20 years. The system does not have any variable rate debt and is not party to any SWAP agreements.

WHAT COULD CHANGE THE RATING - UP

- Increased financial flexibility through building of reserves and maintenance of above-average cash level

- System growth and expansion

- Reduction of debt ratio

WHAT COULD CHANGE THE RATING - DOWN

-Decreased reserve levels and cash position

-Lack of system growth

-Increased debt ratio

KEY STATISTICS

2009 Debt Ratio: 53.1%

2009 Operating Ratio: 70.2%

2006 Net Take-Down: 35.0%

2009 Debt Service Coverage: 2.43x

2010 Debt Service Coverage (unaudited): 3.08x

Pro forma Maximum Annual Service Coverage: 3.23x

Water Supply: Elk River (feeds into Tennessee); safe yield 56 MGD

Water Treatment Capacity: 13.5 MGD

Average Daily Demand: 4.10 MGD

Peak Demand: 8.90 MGD

Sewer Treatment Capacity: 9 MGD permit; 18.0 MGD design

Legal Provisions:

Rate Covenant: 1.2%

Additional Bonds Test: 1.2%

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 and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining 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

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 AN A1 RATING TO THE CITY OF ATHEN'S (AL) $14.23 MILLION WATER AND SEWER REVENUE WARRANTS, SERIES 2010
No Related Data.
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