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MOODY'S ASSIGNS Aa2 RATING TO THE SEVIER COUNTY PBA'S (TN) $21.7 MILLION LOCAL GOVERNMENT PUBLIC IMPROVEMENT BONDS, SERIES V-D-1 (SEVIER COUNTY ELECTRIC SYSTEM)

27 Oct 2010

Aa2 RATING APPLIES TO $46.2 MILLION OF PARITY DEBT, INCLUDING THIS ISSUE

Sevier County Electric System, TN
Electric Utilities
TN

Moody's Rating

ISSUE

RATING

Local Government Public Improvement Bonds, Series V-D-1

Aa2

  Sale Amount

$21,700,000

  Expected Sale Date

10/27/10

  Rating Description

Net Revenues

 

Opinion

NEW YORK, Oct 27, 2010 -- Moody's Investors Service has assigned a Aa2 rating to the Sevier County Public Building Authority's (TN) $21.7 million Local Government Public Improvement Bonds, Series V-D-1. The bonds are secured by loan agreement payments from the Sevier County Electric System, which constitutes a pledge of electric system net revenues.

RATINGS RATIONALE

The bonds will be issued in variable rate mode with a letter of credit from Bank of America, N.A. (Long Term Rating Aa3). At this time, Moody's has also affirmed the Aa2 rating to the Public Building Authority's $24.5 million of parity debt outstanding. The Aa2 rating reflects a stable economy with a strong tourism component, favorable financial operations (including strong debt service coverage), and manageable debt levels. The rating also reflects adequate legal protection for bondholders. Proceeds will be used to refund the system's two outstanding bonds, Series II-A-1 and Series IV-D-1. The refunding does not extend the maturity and does not postpone any significant principal payments.

ADEQUATE LEGAL PROTECTION FOR BONDHOLDERS

Moody's believes the resolution provides adequate legal protection for holders of the Series 2010 bonds. The bonds have a senior lien on net revenues, and after issuance, will constitute the only outstanding long-term debt of the system. The resolution includes a rate covenant that requires annual net revenues to be 120% of total annual debt service. The Debt Service Reserve, with a requirement set at the least of maximum annual debt service (MADS), 125% of annual average debt service, or 10% of principal, will be fully funded with cash over a twenty-four (24) month period following issuance. Additional bonds that are parity to the current debt may be issued if the 12 of the prior 18 month's net revenues are equal to 120% of MADS, or if a rate increase in place would have provided such coverage on a pro forma basis.

SYSTEM PROVIDES ELECTRIC SERVICE TO STABLE EASTERN TENNESSEE COUNTY DEPENDENT ON TOURISM

The electric system distributes electricity purchased exclusively from the Tennessee Valley Authority (TVA, rated Aaa) to a sizeable customer base mostly residing in Sevier County (GO rated Aa2), located in eastern Tennessee; the system is owned by the City of Sevierville (GO rated Aa3). The system's customer base has grown at a steady, average annual rate of 2.1% since 2005, reaching a total of 54,074 in fiscal 2010. This has been driven by the strong growth in population in the county, with an increase of close to 40% in the 1990s and an estimated 19% from 2000 to 2008. Officials expect growth in the base going forward, but have noted a slowdown in the pace of growth due to the national economic downturn. The majority of the system's customers are classified as residential (61%) or small commercial (36%), which includes overnight rentals and condominiums. Given the presence of a portion of the Great Smoky Mountain National Park within the county, the economy has a strong tourism component with attractions such as Dollywood Amusement Park. There is also a strong, though declining, agricultural component, with the principal crops of tobacco, potatoes, green beans and corn. Several industrial parks within the county contribute to some diversification of the economy. Despite this, the seasonal nature of the tourism economy has historically led to fluctuating unemployment levels. Unemployment is currently at 8.4% (August 2010), below that of the state and nation, 9.6% and 9.5%, respectively.

The TVA relationship includes key credit strengths of reliable power supply and restrained fund transfers to city government by TVA (compared to US city-owned electric utilities). An important advantage in the Authority's relationship with TVA has been the ample capacity and strong reliability record of TVA, which has protected municipal distributor system customers from facing price spikes that have become more common in the deregulated wholesale marketplace. That being said, an increase in the cost of power caused TVA to increase wholesale rates by 27% in 2009, but reduced them by 13% the following year due to the decline in fuel prices. As a distributor, the system passes on these increases directly to customers. System officials, though, do not anticipate purchasing power from sources other than TVA for the foreseeable future.

FAVORABLE FINANCIAL OPERATIONS

Moody's expects the electric system's financial operations to continue to be well-managed, given the expectation of strong coverage levels. Debt service coverage by net revenues has been very strong in recent years, averaging 10.8 times since the last issuance in 2006. Fiscal 2008 saw coverage drop to its lowest level in recent history (a still healthy 9.9 times annual debt service) despite an increase in net revenues, due to an increase in required annual debt service. Coverage of MADS by net revenues has averaged a lower, but still strong, 6.2 over the past three years. Officials expect net revenues to remain at or close to current levels going forward, given the board's ability and expectation to pass through any future TVA rate increases. The system also makes annual PILOT payments which have constituted a manageable, $2 million in recent years; coverage remained adequate at 10.1 times in fiscal 2009 after these payments were deducted from net revenues. Working capital fell in the middle of the last decade and has remained low at 5.5% of operations and maintenance in fiscal 2009, as the system has utilized additional funds for capital improvements and prepaid debt. Officials hope to use approximately $1.5 million of net revenues to reduce the system's debt burden annually. The system has a formal policy to maintain a $2 million restricted emergency reserve.

DEBT LEVELS REMAIN MANAGEABLE

Moody's expects the electric system's debt levels to remain manageable, given no additional debt plans. The 19.3% debt ratio is below average for electric distribution systems. Amortization of principal is average, with 45.4% retired in 10 years. Although system officials expect to spend approximately $12 million annually for capital improvements over the next few years, this is expected to be funded out of operations. The system does not currently have any plans to issue debt over the medium-term.

The system currently has two series of debt outstanding, both in variable rate mode. The system's one swap is with Morgan Keegan Financial Products as the counterparty. Under the terms of the swap, the system makes payments based on a fixed rate on an outstanding notional amount of $17 million and received payments based on 63.5% of five-year LIBOR. This arrangement exposes the system to the risk that the Morgan Keegan payment will be less than the adjustable rate it pays on its variable rate obligations. The swap has a remaining term of 14 years and matches the amortization schedule of the II-A-1 bonds and the refunded portion of the current bonds. Other than for standard termination events, the swap may only be terminated if system's rating fell below Baa2. As of October 1st, the termination payment would be $2.9 million, or 41.5% of 2009 unrestricted reserves. The system's Series 2006 bonds were issued with a weekly reset variable rate equal to 70% of LIBOR, which is currently less than 1%. Notably, the system budgets at an assumed interest rate of 5%.

What could make the rating go UP:

- Significant growth in the customer base

- Moderation of debt burden through revenue growth or decreased borrowing

- Improvement of cash and reserve levels

What could make the rating go DOWN:

- Failure to increase revenue in order to maintain satisfactory debt service coverage levels

- Significant additional borrowing resulting in increased debt burden

- Stagnant or negative customer growth

KEY STATISTICS:

Security: Senior lien on net revenues

System: Electric distribution

Service Area: Sevier County and portions of surrounding counties

Number of System Customers: 54,074

Customer Growth (5-yr. average growth): 2.1%

Electric usage (5 yr. average growth): 2.9%

Sevier County Population (2008 est.): 84,835

Sevier County PCI as % of State: 93.1%

Sevier County MFI as % of State: 93.0%

County unemployment (August 2010): 8.4% vs. 9.6% for state

Operating ratio, FY 2009: 93.1%

Debt Service Coverage, FY 2009: 11.49 times

Debt Service Coverage, FY 2009 Net Revenues (including PILOT): 10.09 times

MADS Coverage by FY 2009 Net Revenues: 6.77 times

FY 2005 Debt ratio: 19.3%

Post-issue parity debt outstanding: $21.7 million

The principal methodology used in rating Sevier County Public Building Authority, TN was U.S. Public Power Electric Utilities rating methodology published in April 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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 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

Seth Klempner
Analyst
Public Finance Group
Moody's Investors Service

Christopher Coviello
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 Aa2 RATING TO THE SEVIER COUNTY PBA'S (TN) $21.7 MILLION LOCAL GOVERNMENT PUBLIC IMPROVEMENT BONDS, SERIES V-D-1 (SEVIER COUNTY ELECTRIC SYSTEM)
No Related Data.
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