Aa2 RATING AFFIRMED ON UTILITY'S $43.2 MILLION OUTSTANDING REVENUE BACKED DEBT
Waterworks Utility Revenue Bond Anticipation Notes, Series 2011
Expected Sale Date
Bond Anticipation Notes
NEW YORK, Jan 26, 2011 -- Correction to Moody's Summary Ratings Rationale and Detailed Credit
Discussion to reflect accurate security language for Waterworks Utility Revenue
Bond Anticipation Notes, Series 2011. Revised release follows.
Moody's Investors Service has assigned a MIG 1 rating to Fort Wayne's (IN) $17.8
million Waterworks Utility Revenue Bond Anticipation Notes, Series 2011.
Concurrently, Moody's has affirmed the Aa2 rating on the utility's $43.2 million
outstanding net revenue-backed debt.
SUMMARY RATING RATIONALE
The BANs, which mature February 8, 2012, are payable from the proposed City of
Fort Wayne, Indiana Waterworks Utility Revenue Bonds, expected to be issued in
early 2011. The long-term Bonds will be payable and secured from the Net
Revenues of the Utility. Net Revenues are defined as gross revenues after
deduction only for the payment of the reasonable expenses of operation, repair
and maintenance, but not including depreciation and payments in lieu of taxes.
Proceeds of notes will refund the utility's Waterworks Utility Revenue Bond
Anticipation Notes, Series 2010. Affirmation of the Aa2 rating reflects the
essential nature of the services provided; satisfactory debt coverage ratios;
average legal protections; somewhat limited rate setting flexibility; and
manageable debt profile. Assignment of the MIG1 rating reflects these factors
along with our expectation of continued market access.
- Large and relatively low degree of concentrated customer base
- A history of relatively strong debt service coverage
- Limited rate setting flexibility
- Above average debt burden
DETAILED CREDIT DISCUSSION
DEMONSTRATED MARKET ACCESS
The utility will likely retain favorable access to capital markets given a
history of competitive bids on previous borrowings. Notably, management has
strengthened the current offering by updating its ordinance which now requires
the BANs to be refunded through a negotiated sale. The BANs are expected to be
retired with long term debt; however the utility is first required to receive
approval from the Indiana Utility Regulatory Commission. Officials anticipate
submitting a proposal in March 2011 for approval of the long term issuance and a
rate increase. Should authorization necessitate additional note refunding,
the utility retains flexibility as the statutory limitation on rolling BANs is a
total of five times. The current BANs were initially offered in 2008 for the
acquisition of Aqua Indiana and represent the third refunding.
SERVICE AREA ENCOMPASSES REGIONAL ECONOMIC HUB FOR NORTHEASTERN INDIANA
Located 116 miles northeast of Indianapolis (GO rated Aaa/ stable outlook) and
transverse by Interstate 69, the City of Fort Wayne is the state's second most
populous city and the industrial, agricultural and transportation center for
northeastern Indiana. It's sizeable $8.5 billion tax base recently underwent a
series of annexations of surrounding communities, with the largest one in state
history representing over 25,000 people, effective January 1, 2006. The
Southwest Extended Annexation, or Aboite annexation, added some of the area's
more affluent communities to city tax rolls (census 2000 figures record its per
capita income at 185% of the state). Manufacturing has been, and continues to
be, the backbone of the local economy, though over recent years, its
growing presence as a health care hub and increasing importance of financial
services has served to diversify the local economy. Favorably,
uncertainty regarding GM's stability in the area is somewhat mitigated by
expectations of an addition of a third shift and approximately 700 jobs.
Such gains however are offset by layoffs at many employers, spanning a variety
of industries which has caused the city's unemployment rate to spike to 10.1%
compared to the state's rate of 9.2% for October 2010.
A relatively low degree of customer concentration, along with the essential
nature of the services provided will lend stability to the water utility
operations. The water system's service area covers most of the city and portions
of the surrounding area, with approximately 91% of the current customer base
within the city limits. Although the utility has not gained the residents
incorporated through the Aboite annexation, it has expanded significantly due to
the acquisition of Aqua Indiana's north assets in February 2008. The acquisition
included approximately 8,400customers which have been fully integrated into the
utility. Water is drawn from the St. Joseph River into the utility's Three River
Filtration plant, originally constructed in 1933. The facility has excess
capacity, currently 72 million gallons per day, with a 2010 average daily flow
of 29.4 MGD and peak flow of 54.2 MGD. The utility's 10 largest customers
account for a low 7.40% of fiscal 2009 billings and 13.34% of consumption. The
City of New Haven and General Motors, the two largest customers, accounting for
6.5% of total consumption and 3.65% total fiscal 2009 billings, have special
rate agreements in place with the utility.
HISTORICALLY HEALTHY COVERAGES WITH AVERAGE LEGAL COVENANTS
While the current notes are payable from the expected long-term financing, the
utility's outstanding revenue bonds are secured by the net revenues of the
system (gross revenues less reasonable operation and maintenance expenses, but
before depreciation and PILOT payments). Excess money left after O&M and
debt service will go to meet the reserve requirement for the Reserve Account.
Revenues left after this point will be deposited into a Depreciation Fund, which
can be used for the costs of additions, improvements, and extensions. Funds from
this account can also be transferred to the O&M account or Sinking Fund if
there is a deficiency. In addition to a debt service Reserve Account, bondholder
protections include a 1.2 times rate covenant and 1.25 times additional bonds
test. Historically, the system has maintained healthy coverage rates. Factoring
in the expected long term amortization of the current notes, during peak debt
service in 2019, and under no assumed rate increase, the system retains a strong
projected coverage rate of 1.7 times. Over the last few years the system has
maintained annual debt service coverage in excess of 2 times, with fiscal 2009
net revenues providing a satisfactory 2.2 times debt service.
Though the utility anticipates issuing future debt, the exact timing and amount
of which are undetermined at this time. Notably, management does plan to seek a
rate increase and approval for long-term take out financing of the current
issuance. To set rates, the utility board makes a recommendation to the city
council, which then must be approved by the Indiana Utility Regulatory
Commission. This somewhat limited rate setting flexibility is partially
mitigated by two factors. Strong existing coverage ratios allows the
system sufficient time to make adjustments in response to any delays in
approval for rate changes and the utility's rates fall below average, based on
2010 rate study, affording some room for rate negotiation.
ABOVE AVERAGE BUT MANAGEABLE DEBT BURDEN
The system's debt ratio was a modest 22.4% of net fixed assets and net working
capital in 2009 and aside from the refunding of the current issuance, the system
has limited additional borrowing plans at this time, we expect the debt ratio
will remain manageable. The utility will be required to obtain the IURC's
approval in order to issue any future long-term debt including the refunding of
this issuance. Principal amortization of the water revenue debt is above average
with 100% 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
- Significant leveraging of net revenues above affordable levels
Number of Customers: 84,312
2010 Average Flow (MGD): 29.4
2010 Peak Flow (MGD): 54.2
2009 Operating Ratio: 60.9%
2009 Operating Revenues: $31.3 million
2009 Debt Ratio: 22.4%
Maximum Debt Service Annual Coverage (Long term issuance included): 1.7x
Payout (10 Years): 100%
Rate Covenant: 1.2x
Additional Bonds Test: 1.25x
The principal methodology used in this rating was Bond Anticipation Notes and
Other Short-Term Capital Financings published in May, 2007.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, confidential and proprietary
Moody's Investors Service information, and confidential and proprietary Moody's
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.
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Moody's Investors Service
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REVISED REPORT, CORRECTION TO NOTE SECURITY; MOODY'S ASSIGNS MIG 1 RATING TO CITY OF FORT WAYNE'S (IN) $17.8 MILLION WATERWORKS UTILITY REVENUE BOND ANTICIPATION NOTES, SERIES 2011
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