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New Issue:

MOODY'S ASSIGNS Aa2 RATING TO MONROE COUNTY WATER AUTHORITY'S (NY) $94.5 MILLION WATER SYSTEM REVENUE BONDS, SERIES 2010 A & B

10 Dec 2010

RATING AFFECTS APPROXIMATELY $134 MILLION IN POST-SALE PARITY DEBT

Water/Sewer
NY

Moody's Rating

ISSUE

RATING

Water System Revenue Bonds, Series 2010A

Aa2

  Sale Amount

$3,800,000

  Expected Sale Date

12/14/10

  Rating Description

Revenue

 

Water System Revenue Bonds, Series 2010B (Taxable Build America Bonds)

Aa2

  Sale Amount

$90,705,000

  Expected Sale Date

12/14/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Dec 10, 2010 -- Moody's Investors Service has assigned a Aa2 rating to Monroe County Water Authority's Water System Revenue Bonds, consisting of $3.8 million Series A and $90.7 million Series B - Taxable Build America Bonds. At this time, Moody's has also affirmed the Aa2 rating on the Authority's outstanding bonds, affecting $37.4 million of previously issued debt secured by a first lien on Authority revenues.

RATINGS RATIONALE

The rating reflects the system's large and diverse western New York customer base that is expected to continue to experience moderate growth and a historically low debt position that Moody's believes will remain manageable despite significant debt issuance planned over the next three years. The rating also factors Moody's expectation that despite expected dilution of historically ample debt service coverage with the increasing debt load, management will take steps necessary to maintain satisfactory system liquidity, and that coverage will meet projections at a minimum. Declining debt service coverage beyond what is currently projected could place negative pressure on the authority's creditworthiness. Proceeds of the current issue will provide funding for a new treatment facility.

SATISFACTORY BONDHOLDER LEGAL PROTECTIONS

Moody's believes that legal covenants provide satisfactory protections to bondholders. The Authority is required to set rates such that system net revenues provide 1.2 times coverage of annual debt service. In order to issue additional bonds, either (a) one-half of revenues for any consecutive 24 months of the preceding 36 months must meet this rate covenant; or (b) estimated revenues must meet the rate covenant for the current and next four consecutive fiscal years. A debt service reserve fund, required to be maintained at the lesser of maximum annual debt service or 10% of par, is expected to be funded by a surety bond.

MODERATE GROWTH ANTICIPATED IN LARGE, DIVERSE CUSTOMER BASE

The Authority serves approximately 600,000 individuals in a large, suburban area surrounding the City of Rochester (G.O. rated Aa3), covering a nearly 1,300 square mile service area primarily within Monroe County (G.O. rated A3/stable outlook). The Authority currently serves, either as a retail or wholesale supplier, all areas of Monroe County outside Rochester, as well as portions of Ontario, Genesee (G.O. rated Aa3), Livingston (G.O. rated Aa2), Orleans (G.O. rated A1) and Wayne Counties (G.O. rated Aa2). Additionally, pursuant to a 1978 agreement with the City of Rochester, the Authority and the city exchange water as needed at production cost; the Authority currently supplies approximately one-third of the city's water needs. Since 2003 the Authority has been the net purchaser under this agreement. On an annualized basis, the customer base (projected 171,000 retail accounts and 19,000 accounts in wholesale areas as of fiscal 2010, excluding the City of Rochester) has grown at a modest average rate of 2.4% per year over the past 20 years, reflecting both new residential development within the service area and the acquisition of smaller systems. The customer base is diverse, with the ten largest commercial and industrial customers generating a modest 4% of revenues in 2009. Despite the slowdown in new development with the current national economic downturn, Moody's believes that, given economies of scale inherent in the operation of a large regional system, the Authority will continue to grow at a moderate pace through the absorption of smaller systems challenged by increasing environmental regulations.

ADEQUATE SYSTEM CAPACITY; LOW CURRENT DEBT POSITION EXPECTED TO REMAIN MANAGEABLE DESPITE SIGNIFICANT BORROWING PLANS

The Authority's principal source of water is Lake Ontario, which provides a high-quality, virtually limitless supply. Treatment capacity at the Authority-owned Shoremont Water Treatment Plant equals 140 MGD, which comfortably accommodates average and peak daily production levels of 65 MGD and 123 MGD, respectively. In recent years, management has invested approximately $60 million on a pay-as-you-go basis to improve the distribution system, and management reports an average 15% to 18% unbilled water ratio (includes flushing and fire protection). The Authority's low fiscal 2009 debt ratio, at 12.3%, reflects this historic reliance on cash funding of capital needs. The Authority is reportedly in compliance with all state and federal environmental regulations.

To enhance system reliability, accommodate expected customer growth on the east side of the Genesee River, and decrease pumping costs, the Authority is building a second, 50 MGD treatment plant (Eastside Water Supply Project). On a pro-forma basis, issuance related to the $150 million Eastside Water Supply Project and other CIP projects (which total $103.7 million through 2015) is expected to raise the Authority's debt ratio to 37%, slightly above Moody's median debt ratio of 36.2% for similarly rated water systems. The CIP is expected to be largely debt financed, less $50 million of cash funding and $23 million expected to be grant funded. The current sale is expected to be the final borrowing for this plant.

HISTORICALLY STRONG DEBT SERVICE COVERAGE EXPECTED TO NARROW WITH UPCOMING ISSUANCE

The Authority's strong financial operations, supported by steady growth in the customer base, have historically provided ample coverage for the Authority's debt. Over the past five years (2005 through 2009), financial operations provided strong 5.7 times average coverage of senior lien debt service, and still ample 4.3 times coverage of all debt service, including subordinate lease payments. The system's low operating ratio, at 37.9%, compares favorably with similarly rated systems (median operating ratio equals 66.7%), indicative of strong historic financial performance. Despite ongoing cash-funding of capital expenditures, system liquidity remains strong, with fiscal 2009 cash and net working capital levels equal to 72.5% and 204.3% of operating expenses, respectively, well in excess of management's target of maintaining six months cash on hand.

Based on pro forma information provided by the Authority, the upcoming planned debt issuance is expected to dilute debt service coverage considerably over the near term. Debt issuance planned for the next three years is projected to drive coverage levels down to approximately 1.5 times to 1.7 times through 2020, based upon adoption of moderate (4.3% to 4.9%) annual rate increases. Authority rates are not subject to external regulation or approval, and are currently low relative to peer systems. Although there has not been a need to raise rates in recent years, Moody's expects that management will implement timely increases as planned to maintain debt service coverage in line with projections at minimum. Failure to meet projected debt service targets and maintain liquidity in line with informal targets could place downward pressure on the rating.

Key Statistics:

Security: Net revenue of water system

Service Area: 600,000 service area population with 171,000 retail and 19,000 wholesale accounts areas

Typical peak flow as % of capacity: 75% (Shoremont Water Treatment Plant)

Fiscal 2009 debt service coverage - sr. lien: 4.23 times

Fiscal 2009 debt service coverage - all debt: 3.44 times

Projected debt service coverage (through 2020): 1.5 times - 1.7 times

Fiscal 2009 debt ratio: 12.3%

Pro-Forma debt ratio (2015): 37%

Fiscal 2009 operating ratio: 37.9%

Post-sale parity debt outstanding: $134 million

WHAT COULD CHANGE THE RATING - UP

-Trend of operating surpluses, increasing debt service coverage

WHAT COULD CHANGE THE RATING - DOWN

- Reduced debt service coverage levels below current projections

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, public information, and confidential and proprietary Moody's Investors Service 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

Jessica A. Tevebaugh
Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
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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MOODY'S ASSIGNS Aa2 RATING TO MONROE COUNTY WATER AUTHORITY'S (NY) $94.5 MILLION WATER SYSTEM REVENUE BONDS, SERIES 2010 A & B
No Related Data.
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