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MOODY'S ASSIGNS Aa2 RATING ON WESTERN LAKE SUPERIOR SANITARY DISTRICT'S (MN) $16.4 MILLION TAXABLE GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011A AND $2.4 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011B (AMT)

22 Jul 2011

Aa2 RATING APPLIES TO (MN) $53.3 MILLION OUTSTANDING GENERAL OBLIGATION DEBT

Water/Sewer
MN

Moody's Rating

ISSUE

RATING

Taxable General Obligation Refunding Bonds, Series 2011A

Aa2

  Sale Amount

$16,425,000

  Expected Sale Date

07/25/11

  Rating Description

General Obligation Unlimited Tax

 

General Obligation Refunding Bonds, Series 2011B

Aa2

  Sale Amount

$2,380,000

  Expected Sale Date

07/25/11

  Rating Description

General Obligation Unlimited Tax

 

Opinion

NEW YORK, Jul 22, 2011 -- Moody's Investors Service has assigned a Aa2 rating to Western Lake Superior Sanitary District's (MN) $16.4 million Taxable General Obligation Refunding Bonds, Series 2011A and $2.4 million General Obligation Refunding Bonds, Series 2011B (AMT). Concurrently, Moody's has affirmed the Aa2 rating on the district's outstanding general obligation debt, affecting $53.3 million post-sale.

SUMMARY RATING RATIONALE

The bonds are secured by the district's general obligation unlimited tax pledge, though debt service is expected to be repaid by net revenues of the system. Proceeds of the Series 2011A bonds will refund the district's outstanding general obligation notes Series 1998D, 1999B, and 2002C. The Series 2011 B will refund outstanding general obligation bonds Series 2002A. The refunding is expected to generate net present value savings. The Aa2 rating reflects the district's sizeable and relatively diverse service area in northeastern Minnesota; healthy operations with growing reserves; and moderate debt burden with rapid principal amortization.

STRENGTHS

-Solid financial operations, healthy liquidity

-Unlimited rate setting authority

CHALLENGES

-Declining valuations

DETAILED CREDIT DISCUSSION

SIZABLE AND DIVERSIFYING TAX BASE LOCATED IN NORTHEASTERN MINNESOTA

Located in northeastern Minnesota, Western Lake Superior Sanitary District (WLSSD) benefits from a large (513 square miles) and relatively diverse service area, which includes a sizeable $10.6 billion full valuation and a population of approximately 137,000. Growth in previous years reflect successful efforts by the City of Duluth (general obligation rated Aa2), and the counties of St. Louis (Aa2) and Carlton (Aa2) to diversify the area economy by attracting new manufacturing and industry. More recently, the district's taxbase had declined by 1.5% in 2009 and an additional 6.7% in 2010. Despite the decline in valuations, notably the district's service area continues to expand given the ample amount of developable land. The district continues to see a strong presence with the paper industry, with Sappi (senior unsecured debt rated Ba3/positive) as one of the district's second largest comprising 1.7% of assessed valuation. Officials report stable operations. Forestry, mining, and agriculture remain important components of the economy, although this has been somewhat offset with growing health care and retail sectors. St. Louis County wealth indices remain below state figures, with per capita and median family incomes at 81.8% and 82.9% of state levels, respectively.

STABLE FINANCIAL OPERATIONS WITH INCREASING RESERVE LEVELS

Moody's believes the district's financial operations will remain sound given its history of conservative fiscal management, expectations of continued commercial and residential expansion leading to increases in system customers, connection, and service fees, and the diversity of the district's revenue sources. The district liquidity has been increasing, with net working capital growing from $9.6 million at the close fiscal 2005 to $14.4 million, or a healthy 64.6% of operating and maintenance (O&M) expenditures at the close of fiscal 2010. The district maintains a formal policy of 12 months in reserves in its Debt Service Fund, and a minimum of 15% in unrestricted reserves of budgeted operating expenditures, and has unlimited statutory authority to raise rates to maintain reserves at these conservative levels. Officials expect to increase rates on an annual basis, although coverage is expected to stay within above policy guidelines between 1.5x and 1.7x of maximum annual debt service. Historical coverage levels have remained in this range, with a coverage of 1.62x in fiscal 2010.

The district's revenue sources are diverse, and include 89% user charges comprised of municipalities, industries and solid waste. The remaining revenue sources include service fees and district-wide allocations. The district's largest industrial wastewater user, Sappi accounts for 25% of revenues. While revenue concentration exists, we believe that this is mitigated by the district's maintenance of approximately 13-month reserve within the debt service fund, conservative budgeting assumption and commitment to sound financial operations, ample revenue-raising flexibility and the unlimited statutory authority to levy taxes to cover debt service. The district's budgets do not include expansions and are based on current load levels. Officials report positive operations year-to-date for fiscal 2011. We expect the district's financial position to remain favorable in the foreseeable future.

MODERATE DEBT BURDEN WITH AGGRESSIVE PRINCIPAL AMORTIZATION

The district's overall debt burden is moderate at 4.1% (0.1% direct), reflecting primarily the issuance of overlapping entities, as the WLSSD direct debt is paid from system revenues and user fees. While the debt is repaid entirely from system revenues and fees, it is ultimately secured by the district's general obligation unlimited tax pledge. We believe that the district's development and continued maintenance of a ten-year capital plan reflect prudent management and strategic long term planning that will ultimately enable the district to meet ongoing capital needs issuing only limited additional debt. Officials report the current ten-year capital plan outlines approximately $116 million of infrastructure improvements and ongoing maintenance costs, with approximately $30 million funded on a pay as you go basis. Principal repayment is average with 46.2% of principal amortized in ten years.

WHAT COULD CHANGE THE RATING UP

-Significant increases in liquidity and reserve levels

-Significant expansion of economy and customers

WHAT COULD CHANGE THE RATING DOWN

-Significant decline in liquidity and coverage ratios

-Significant deterioration in economy leading to customer loss

KEY STATISTICS:

2000 Population: 130,962

2010 Population: 137,536

2010 Full value: $10.6 billion

Overall debt burden: 4.1% (0.5% direct)

Principal amortization rate (10 years): 46.2%

2000 Per capita income as a % of state (St. Louis County): 81.8%

2000 Median family income as a % of State (St. Louis County): 82.9%

Fiscal 2010 net working capital: $14.4 million, 64.6% of O&M

Fiscal 2010 debt service coverage: 1.62x

Post-sale general obligation debt outstanding: $60.9 million, including current offering

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a 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

Soo Yun Chun
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


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MOODY'S ASSIGNS Aa2 RATING ON WESTERN LAKE SUPERIOR SANITARY DISTRICT'S (MN) $16.4 MILLION TAXABLE GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011A AND $2.4 MILLION GENERAL OBLIGATION REFUNDING BONDS, SERIES 2011B (AMT)
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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