Aa1 RATING APPLIES TO $60.5 MILLION OF POST-SALE SENIOR LIEN DEBT
Des Moines (City of) IA Waterworks
Water Revenue Refunding Bonds, Series 2011
Expected Sale Date
NEW YORK, Jan 20, 2011 -- Moody's Investors Service has assigned a Aa1 rating to the City of Des Moines'
(IA) $10.8 million Water Revenue Refunding Bonds, Series 2011. Concurrently,
Moody's has affirmed the Aa1 rating on the water utility system's outstanding
water revenue debt, affecting $60.5 million of post-sale debt.
SUMMARY RATING RATIONALE
The bonds are secured by net revenues of the city's water utility. Proceeds will
be used to refund the utility's Series 2004B bonds for an estimated net present
value savings of 3.75% of refunding par. The utility will also release $700,000
from the debt service reserve fund, which will be used to pay down principal on
the Series 2004B bonds. The Aa1 rating reflects the system's stable and diverse
service area covering the majority of the Des Moines (GO rated Aa1) metropolitan
area; satisfactory financial operations supported by annual review of rates;
solid debt service coverage ratios; satisfactory legal provisions; and a
manageable debt profile with no additional borrowing planned in the near term.
- Stable and diverse service area with long-term wholesale customer contracts
- Independent rate-setting authority coupled with annual review of rates
- Healthy debt service coverage ratios
- Limited liquidity in unrestricted cash
- Moderate net working capital levels compared to peers at rating level
DETAILED CREDIT DISCUSSION
SATISFACTORY LEGAL PROVISIONS WITH FULLY FUNDED DEBT SERVICE RESERVE FUND
Legal protections as defined in the utility's bond resolution
provide satisfactory security for bondholders. The rate covenant stipulates that
the water utility maintain rates at levels to ensure a sound 1.25 times annual
debt service coverage on all outstanding revenue debt. The additional bonds test
is set at 1.30 times of maximum annual debt service for all outstanding revenue
bonds. The bond resolution also requires a debt service reserve fund fully
funded equal to the lesser of maximum annual debt service (MADS), 10% of the
bonds and parity bonds outstanding, or 125% of the average principal and
interest coming due in any succeeding fiscal year. The system maintains an
additional water revenue improvement fund, which contains a minimum of $600,000
that can be used for debt service needs or capital improvements, providing
additional cushion for bondholders.
STABLE AND DIVERSE SERVICE AREA COVERS MAJORITY OF DES MOINES METROPOLITAN AREA
The system serves the city of Des Moines, as well as the majority of the
surrounding metropolitan area, covering 400 square miles with an estimated
service area population of 452,000. The system has long-term wholesale contracts
with thirteen metro area municipalities and water districts and provides retail
water to the city of Des Moines, seven municipalities and water districts,
and unincorporated portions of Polk County (Aaa/stable outlook). The Des Moines
economy is anchored by the city's role as the state capital and is complemented
by a diverse business environment that includes financial, insurance, health
care and manufacturing concerns. The water utility draws water from the Raccoon
and Des Moines rivers and maintains three water treatment facilities, with the
third facility recently built and expected to be fully operational by March
2011. The Iowa Department of Natural Resources limits the utility to withdraw
120 million gallons per day from the rivers and maximum daily demand in 2009 was
75.52 million gallons, representing more than adequate capacity for
additional growth within the system.
The utility had nearly 80,000 retail customers in 2009, with the top ten retail
customers only totaling a modest 4.22% of billings, indicating a fairly diverse
customer base. Wholesale customers comprise approximately 25% of revenues, with
the top ten wholesale customers accounting for 21.08% of 2009 billings. The city
of Urbandale (water revenue debt rated Aa2) is the largest wholesale user at 4%
of billings and has remained relatively steady in its demand. Usage has
experienced a modest 1.2% average annual rate of decline since 2006,
attributed to wet weather patterns. We expect the utility's retail customer base
will continue to see modest increases as the system's service area continues to
experience population growth, though the wholesale base will likely remain
relatively stable as it already encompasses the majority of the metro area.
ANNUAL RATE ADJUSTMENTS CONTRIBUTE TO SOLID DEBT SERVICE COVERAGE
DESPITE LIMITED LIQUIDITY
We anticipate the system's financial operations will remain stable due to
independent rate-setting authority and a history of annual rate adjustments. The
utility performs an annual cost of service study to ensure that rates remain
sufficient to cover operating expenses as well as plan for investment in
replacement of assets. The utility typically increases rates on an annual basis,
with the next rate increase set for April 1, 2011 at an average increase of
10% across service classifications. Despite the regular rate increases, the
system's liquidity is relatively low compared to similar systems and primarily
reserved for restricted assets, with only $3.2 million in cash available for
unrestricted purposes (10.8% of operating and maintenance (O&M) expenses).
Favorably, unrestricted cash has been increasing in recent years, with a
nearly $1 million increase from fiscal 2008 to fiscal 2009. Moody's calculation
of the system's 2009 net working capital stood at $12 million, or a satisfactory
40.8% of O&M expenses. Officials report that fiscal 2010 financial
operations ended comparably to fiscal 2009, and the fiscal 2011 budget is
expected to be similar as well, with a projected 4.4% increase in
expenditures offset by the April 2011 rate increase.
Debt service coverage is healthy and is expected to remain strong going forward.
Fiscal 2009 debt service coverage was a solid 1.84 times debt service coverage.
Additionally, based on 2009 revenues, post-sale maximum annual debt service
coverage ($6.6 million in fiscal 2016) is currently estimated at 1.86 times.
Following the maximum annual debt service payment in 2016, debt service declines
by over $1 million in 2017 and a subsequent $1 million in 2018 allowing capacity
for future debt service without deterioration in coverage.
MODEST DEBT RATIO WITH NO ADDITIONAL CAPITAL BORROWING PLANNED IN NEAR TERM
The utility has no major capital needs in the near term and officials do not
anticipate needing to expand capacity over the medium to long term. The system's
debt ratio was a modest 17.6% of net fixed assets and net working capital in
2009, and as the system has no additional borrowing plans at this time, we
expect the debt ratio will remain manageable. Principal amortization of the
water revenue debt is above average with 74% of principal repaid in ten
years, which indicates that the system should be able to absorb future debt
without significant impact to the debt ratio or financial operations. All of the
system's debt is fixed rate, and the system is not a party to any interest rate
WHAT COULD MOVE THE RATING - UP
-Maintenance of healthy debt service coverage
-Strengthened net working capital and liquidity
-Continued expansion of customer base
WHAT COULD MOVE THE RATING - DOWN
-Deterioration in annual debt service coverage below similarly rated enterprises
-Significant leveraging of net revenues above affordable levels
System: Water treatment and distribution (open loop)
Number of Customers (2009): 79,698 retail meters
Service area population (2010 estimate): 452,390
Fiscal 2009 Net working capital: $12 million (40.8% of O&M)
Fiscal 2009 Unrestricted cash: $3.2 million (10.8% of O&M)
Fiscal 2009 Operating ratio: 72.6%
FY2009 Debt ratio: 17.6%
FY2010 Maximum annual debt service coverage: 1.86x
Post-sale revenue debt outstanding: $62.1 million ($60.5 million of rated debt)
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Analytical Framework For Water
And Sewer System Ratings published August 1999.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public
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.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
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MOODY'S ASSIGNS Aa1 RATING TO THE CITY OF DES MOINES' (IA) $10.8 MILLION WATER REVENUE REFUNDING BONDS, SERIES 2011
Moody's Investors Service
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