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New Issue:

MOODY'S ASSIGNS Aa1 RATING TO THE CITY OF DES MOINES' (IA) $10.8 MILLION WATER REVENUE REFUNDING BONDS, SERIES 2011

20 Jan 2011

Aa1 RATING APPLIES TO $60.5 MILLION OF POST-SALE SENIOR LIEN DEBT

Des Moines (City of) IA Waterworks
Water/Sewer
IA

Moody's Rating

ISSUE

RATING

Water Revenue Refunding Bonds, Series 2011

Aa1

  Sale Amount

$10,815,000

  Expected Sale Date

01/25/11

  Rating Description

Revenue

 

Opinion

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.

STRENGTHS

- 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

CHALLENGES

- 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 swap agreements.

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

KEY STATISTICS:

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.

REGULATORY DISCLOSURES

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

Emily Robare
Analyst
Public Finance Group
Moody's Investors Service

Nora Wittstruck
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO THE CITY OF DES MOINES' (IA) $10.8 MILLION WATER REVENUE REFUNDING BONDS, SERIES 2011
No Related Data.
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