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MOODY'S ASSIGNS Aa3 RATING WITH STABLE OUTLOOK TO CENTRAL ARKANSAS WATER'S (AR) $14.17 MILLION SUBORDINATE LIEN REFUNDING WATER REVENUE BONDS, SERIES 2011B

26 Jul 2011

CONCURRENTLY MOODY'S AFFIRMS Aa3 RATING OF $35.46 MILLION IN PREVIOUSLY ISSUED SUBORDINATE LIEN PARITY DEBT OUTSTANDING AS WELL AS AFFIRMS THE Aa2 RATING OF $33.1 MILLION IN PREVIOUSLY ISSUED SENIOR LIEN DEBT OUTSTANDING

Water/Sewer
AR

Moody's Rating

ISSUE

RATING

Refunding Water Revenue Bonds, Series 2011B

Aa3

  Sale Amount

$14,700,000

  Expected Sale Date

08/01/11

  Rating Description

Refunding Water Revenue Bonds, Series 2011B

 

Opinion

NEW YORK, Jul 26, 2011 -- Moody's Investors Service has assigned a Aa3 underlying rating with a stable outlook to Central Arkansas Water's (AR) $14.17 million subordinate lien Refunding Water Revenue Bonds, Series 2011B. Concurrently, Moody's has affirmed the Aa3 rating on approximately $35.46 million in outstanding subordinate lien parity debt previously issued. Moody's has also affirmed the Aa2 rating on approximately $33.1 million in previously issued senior lien debt outstanding. Proceeds from the sale of Series 2011 Bonds will refund certain existing debt for a net present value savings and no extension of the final maturity.

SUMMARY RATINGS RATIONALE

The bonds are payable solely from the net revenues of the Water System less amount required to be used to make payments and deposits with respect to the Prior Debt and less amounts transferred to and plus amounts transferred from the Rate Stabilization Account, and other amounts available under the Indenture. The Aa3 rating with no outlook reflects the system's stable and predominately residential customer base, adequate legal provisions, stable financial operations with healthy coverage of debt service requirements including junior lien bonds, as well as an adequate reserve position.

STRENGTHS

* Stable and predominately residential customer base centered around regional hub

* Healthy coverage of total debt outstanding

CHALLENGES

* Flat customer growth expected in near term

DETAILED CREDIT DISCUSSION

STABLE PREDOMINATELY RESIDENTIAL CUSTOMER BASE; NO SIGNIFICANT ISSUES WITH CURRENT WATER SUPPLY OR EXISTING SYSTEM FACILITIES

We believe the predominately residential customer base will remain stable in the near term. Central Arkansas Water (CAW) has historically been the dominate wholesale and retail water source for the Little Rock (Aa2 stable outlook) metropolitan area and surrounding areas. The system is comprised of various storage facilities, pump stations, transmission lines, and two treatment plants. CAW's water supply is derived from two main sources, Lake Winona and Lake Maumelle. System officials believe the current water sources are adequate to cover the projected needs of its customers through 2060 and the system is currently in compliance with all environmental regulations. Current significant system upgrades include nearing completion of the transmission line to the City of Cabot northeast of the Little Rock metro area. System officials do not report any significant capacity issues at existing system facilities. The City of Little Rock is the largest city in the state and also the state capital which, along with established centers of higher education and regional medical facilities, provides stability in the system's predominately residential base. As of May 2011 the system served a total of 122,822 customers, roughly 86.7% of which were classified as domestic. The system's largest customer in fiscal 2010 was Jacksonville Water Works which represented a modest 2.3% of total revenues. Overall, the top ten customers represented a modest 8.8% of annual revenues. The system's total customer count has grown roughly 0.5% on average annually over the last five years from the period of fiscal 2006 to 2011.

ADEQUATE LEGAL PROVISION WITH WEAKENED DEBT SERVICE RESERVE AND CASH REQUIREMENTS

Last year bonds were issued under a newly adopted resolution, which created an additional lien on net revenues of the system, subordinate to prior revenue bonds issued in 2002, 2004 and 2007. The system elected to close out the prior ordinance and issue subordinate lien bonds that are secured by "stabilized" net revenues of the system, which are net of prior lien debt service requirements and transfers to the rate stabilization account. The debt service reserve (DSR) requirement for the subordinate lien bonds is equal to 5% of par or 50% of maximum annual debt service (MADS). The DSR is expected to be cash funded with proceeds from the sale. Security provisions include a rate covenant of 1.20 times annual debt service (senior and junior liens), and an additional bonds test of 1.20 times. The subordinate resolution also reduces the amount of required working capital reserve from three months (90 days) to 45 days of operating and maintenance expense. In place of the working capital requirement is the establishment of a rate stabilization fund to be funded with excess system revenues. As long as senior lien debt is outstanding, the working capital requirement of 90 days will be required as outlined in the senior lien ordinance. We believe the weakened liquidity requirements and lowered DSR contributes to the lower rating of the subordinate debt. All outstanding debt is fixed rate and the system is not party to any derivative agreements.

STABLE FINANCIAL OPERATIONS WITH HEALTHY COVERAGE OF DEBT SERVICE REQUIREMENTS

We expect the system's financial position to remain stable in the near term which is evident in strong historical balance sheet performance. Including an equalized rate increase of roughly 6% in Little Rock and North Little Rock, fiscal 2010 net revenues of the system equaled $14.9 million which provides a healthy 4.9x coverage of Maximum Annual Debt Service (MADS) for senior lien debt. Stabilized net revenues of roughly $10.7 million for the same time frame provide roughly 2.8x coverage of MADS for subordinate lien debt inclusive of the current refunding. The system's operating ratio for fiscal 2010 of 70.3% was slightly above average for similarly rated systems. At fiscal year-end 2010, the system's unrestricted reserve position was equal to roughly 40.7% of system operating and maintenance expenses which is below average. The master trust indenture requires the system to maintain three operating months of working capital, which Moody's considers a positive credit factor. Although this has been lowered with the subordinate lien ordinance to 45 days, outstanding senior lien debt will require the 90 day reserve. System officials report that rates for water services are reviewed annually and rate increases are expected for fiscal 2013 and 2014. System officials report current year to date performance of revenues down roughly $1.4 million below budget and expenditure also down roughly $1.0 million under fiscal 2011 budgeted targets. System officials believe budgeted revenues will be made up during the peak summer months of July and August and by fiscal year's end (December 31) as current output is up 14% above last year at the same time. System officials fully expect to meet or modestly exceed a budgeted $52 million revenue mark for fiscal 2011 as national record heat levels and days of drought conditions are being recorded across much of the nation.

MANAGEABLE DEBT PROFILE

CAW's debt ratio at fiscal year-end 2010 was a low 17.1%. Inclusive of the current sale, CAW will have $33.1 million in outstanding senior lien revenue debt and $49.6 million in outstanding junior lien revenue debt. Future debt plans include the issuance of roughly $22.5 million in 2012 and an additional $11.5 million in 2014 for treatment plant improvements. Moody's anticipates the utility's debt position will remain manageable given planned rate increases and modest growth projected in the system.

OUTLOOK

Moody's outlook for Central Arkansas Water's rating is stable, reflecting our expectations that slow growth and timely rate adjustments will allow the authority to meet operational and debt financing needs.

WHAT COULD MAKE THE RATING GO UP

* Improved debt service coverage

* Trend of increased reserve levels

WHAT COULD MAKE THE RATING GO DOWN

* Narrowing of debt service coverage

* Narrowing of reserve levels

KEY STATISTICS:

Security: Stabilized net revenues of system

2011 Customers: 122,822

Fiscal 2010 operating ratio: 70.3%

Fiscal 2010 debt ratio: 17.1%

Repayment of outstanding bond principal (10 years): 65%

Projected fiscal 2011 debt service coverage including junior lien bonds: 2.49x (Coverage for additional bonds test 1.20x)

Projected Maximum Annual Debt Service (2020) coverage of Senior and Subordinate lien bonds by stabilized net revenues: 1.56x

Senior lien revenue debt outstanding: $33.1 million

Junior lien revenue debt outstanding: $49.63 million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Analytical Framework for Water and Sewer System Ratings published in August 1999. 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, [and] parties not involved in the ratings, [and] public 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

James Hobbs
Analyst
Public Finance Group
Moody's Investors Service

Michelle Smithen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING WITH STABLE OUTLOOK TO CENTRAL ARKANSAS WATER'S (AR) $14.17 MILLION SUBORDINATE LIEN REFUNDING WATER REVENUE BONDS, SERIES 2011B
No Related Data.
© 2019 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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