NEW YORK, Feb. 6, 2001 — Moody's Investors Service has assigned an A2 rating to the City of Gastonia Combined Utilities System Revenue Bonds, Series 2001 affecting $47.4 million of outstanding revenue bonds.
At this time Moody's has changed the outlook to positive from stable. MBIA is expected to insure the bonds. Subject to Moody's review of the insurance policy and other relevant documentation, the bonds are expected to carry MBIA's current financial strength rating of Aaa. The A2 underlying rating will continue to be maintained. The A2 rating is based on satisfactory coverage of parity debt service requirements, a manageable debt position with modest future borrowing plans, and a moderately expanding service area.
The positive outlook is predicated on Moody's expectation that given the system's significant capacity, customer base growth and increased municipal customers will enable the system to enhance revenues without a significant corresponding increase in costs. The bonds are secured by a pledge of net revenues of the city's water and sewer utility and proceeds will be used to fund system expansions.
Moody's expects that the utility's healthy financial position will be maintained given continued planned rate increases and its ongoing transition to a more stable residential customer base. Net revenues in 2000 provided 2.0 times coverage of maximum parity revenue bond debt service, including the current issue, and 1.2 times of all utility debt (including G.O. water & sewer bonds).
Similar coverage is expected to be maintained given the utility's plan to implement rate increases of 5% annually over the next five years. The city has demonstrated a willingness to raise rates as needed. The annual average water and sewer bill increase since 1994 has been 5.5% and 6.6% respectively. The city's General Fund receives a relatively modest transfer from the water and sewer fund, $462,000 in fiscal 2000, and plans to reduce this transfer to $200,000 per year by 2005.
Fiscal 2000 results declined from the prior year due to the loss or decrease of several large industrial customers. Despite this loss Moody's believes that the system's continued diversification and transition to a more stable residential customer base will result in healthy financial operations going forward.
The city has plans to offer long term water and sewer service contracts to municipalities not currently served by the system which Moody's believes will provide the utility with a stable revenue source going forward. Satisfactory legal provisions include a debt service reserve fund, equal to maximum annual parity debt service requirements, that will be funded with a surity bond; a rate covenant that requires 1.2 times coverage of maximum annual parity debt service requirements; and an additional bonds test that requires 1.2 times coverage of maximum annual parity debt service.
Moody's believes that the system's debt ratio will remain manageable given no future borrowing plans and an aggressive rate supported capital program. The system's debt ratio is a moderate 35.7%, reflecting $58.5 million of revenue bonds and state loans and $19.2 million of general obligation bonds.
Principal payout of the system's revenue bonds is average with 58.7% retired in ten years and all debt defeased within 25 years. Future borrowing plans include a $10 million issue in fiscal 2002 to finance line extensions to annexed areas.
Moody's expects the system's service area and customer base will continue to expand given its proximity to Charlotte (G.O. bonds rated Aaa), reduced dependence on the textile industry, and periodic annexations.
The system serves 23,800 water and 20,800 sewer customers and customer growth has averaged a moderate 1.7% since 1996. While the top ten users are somewhat concentrated, comprising 25.3% of operating revenues, five of the customers are towns in which the system is the sole supplier pursuant to a long-term contract. Although textiles remain important, recent economic growth has occurred in the residential and commercial sectors. The utility has current water treatment capacity of 27.3 MGD, well above its average usage of 14.3 MGD. The city has ample raw water resources for at least 50 years. Sewer treatment capacity is 22 MGD, well above its average usage of 10.9 MGD. Sewage usage has declined in recent years due to a loss of significant industrial users. Given the ample treatment capacity for both water and sewer, Moody's believes that future borrowing will be relatively modest.
Moody's positive outlook is based on our expectation that customer base growth and increased municipal customers will enable the system to enhance revenues without significantly increased costs. The system has ample supply and treatment capacity due to an expansion that occured in the early 1990's.
The expansion was intended to supply manufacturing entities, that no longer exist. Moody's expects the system's growing customer base to provide enhanced revenue without the significant costs often associated with system expansion. The system's plans to increase the number of municipal customers also points towards a positive credit outlook.
Key Statistics:
Number of accounts: 23,800 water and 20,800 sewer Operating ratio: 68% Debt service coverage, revenue debt, 2000: 2.01 times Debt service coverage, all debt, fiscal 2000: 1.20 times Peak debt service coverage, revenue debt, fiscal 2004: 1.59 times Peak debt service coverage, all debt, fiscal 2004: 1.04 times Debt ratio: 35.7% Payout of revenue debt principal (10 years): 58.7%
