MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF LAWRENCE'S (KS) $19.8  MILLION WATER AND SEWAGE SYSTEM IMPROVEMENT REVENUE BONDS, SERIES 2007

 

Aa3 RATING APPLIES TO $44.7 MILLION OF PARITY DEBT, INCLUDING CURRENT OFFERING

Moody's Investors Service has assigned a Aa3 rating to the City of Lawrence's (KS) $19.8 million Water and Sewage System Improvement Revenue Bonds, Series 2007. Concurrently, Moody’s has affirmed the Aa3 rating on the city’s parity debt. The city has $44.7 million of outstanding water and sewer revenue parity debt, including the current issue. At this time, Moody’s also affirms the Aa2 rating on the city’s $85.1 million of outstanding general obligation debt. The current bonds will finance various capital improvements to the city’s water and sewer system. Debt service on the current issue is secured by a senior lien on the net revenues of the water and sewer utility. Affirmation and assignment of the Aa3 rating reflect the system’s stability that is provided in part by its top customer, the University of Kansas; satisfactory financial operations that are expected to continue; city commission authorized rate increases that provide adequate debt service coverage; significant plans for future debt; and satisfactory legal covenants.

STABILITY PROVIDED BY UNIVERSITY OF KANSAS; POPULATION GROWTH EXPECTED TO CONTINUE

The City of Lawrence’s water and sewer system serves approximately 30,000 customers, most of whom are located within the city’s corporate limits. Located in Douglas County (general obligation rated Aa3), Lawrence's large $5.6 billion taxbase has grown at a steady pace: full value increased at an average annual rate of 7% between 2001 and 2006 (compared to a median average annual growth rate of 6.4% for Kansas cities). Moody's anticipates that this taxbase growth will continue, driven by continued development as new residents move to the area, which is favorably located 37 miles west of Kansas City, Missouri (Aa3/stable outlook) and 28 miles east of the Kansas state capital of Topeka (Aa3/stable outlook). Population has nearly doubled since 1970 to a current estimated population of 90,335, and officials project that the population will further increase to approximately 150,000 by 2025. Mirroring the increases in the city’s population are increases in the water and sewer system customers. The utility has experienced a steady average annual growth rate of 2.5% over the last five years. With the expected continued increases in population, officials are projecting a steady growth rate in the customer base of approximately 2.0% per year going forward. The city's taxbase and the water and sewer system derive stability the presence of the University of Kansas (issuer rated Aa2). The university's main campus is located in the city; current enrollment is over 26,000 students. The University of Kansas is the system’s top customer, representing 8.4% of total water consumption. The ten largest customers comprise 27% of total water consumption. In addition to its retail customers, the system provides wholesale treated water service to five rural water districts and the City of Baldwin.

SATISFACTORY FINANCIAL OPERATIONS EXPECTED TO CONTINUE; CITY COMMISSION AUTHORIZED RATES PROVIDE ADEQUATE DEBT SERVICE COVERAGE

Moody's expects the city's water and sewer system to continue its trend of satisfactory financial performance. The city's Water and Sewer Enterprise Fund closed fiscal 2005 with $55.5 million in net working capital, including $38.1 million held as unrestricted cash and investments, representing ample liquidity to meet contingency needs. The system’s operating ratio was a decent 49% in fiscal 2005. Historically, the utility’s financial operations have enabled the system to generate net revenues that provide more than 2.0 times debt service coverage on all debt. Fiscal 2005 net revenues would provide a strong 4.07 times maximum annual debt service coverage on all existing senior lien debt (including the current issue).

The Lawrence City Commission has independent rate setting authority, and in December 2004, the commission approved annual water rate increases of 4% and annual sewer rate increases of 9% for the subsequent five years. The rate increases were approved in anticipation of more than $200 million worth of planned capital improvement projects (from 2007 to 2013). The projects will be financed primarily with future debt issuances. A smaller portion of the projects will be financed with cash, but Moody’s expects liquidity levels to remain healthy. Factoring in planned future rate increases, the system’s debt service coverage is projected to drop below 2.0 times coverage beginning 2008. However, given the city commission’s demonstrated willingness and ability to raise rates as required by the system’s Capital Improvement Plan, Moody’s expects that debt service coverage will remain satisfactory, despite the additional debt.

SIGNIFICANT FUTURE DEBT PLANNED

Lawrence’s water and sewer system's debt position will increase over the next several years due to plans for significant capital improvements. However, the increase in the value of fixed assets that will result from the capital improvements should help to moderate increases in the debt ratio. The system currently has $44.7 million in senior lien debt (including the current issue) and $43.3 million in junior lien debt (which consist of state revolving fund loan obligations that are ultimately secured by the city’s general obligation pledge). Payout for the existing senior lien debt is somewhat slow, with 41% of the principal amortized in ten years. The system’s fiscal 2005 debt ratio was a manageable 37.6% (representing senior and junior lien debt).

In order to meet the city’s growth related demands, update existing infrastructure, and comply with environmental regulations, the utility plans to undertake several large-scale capital projects in the near future. The capital improvement plan forecasts total improvements of more than $200 million over the next seven years; approximately 2/3 of this amount will be used for sewer system improvements, with the remaining monies to be used for water system projects. Officials estimate the system will issue more than $167 million in debt (projected principal) for these projects through 2013, which will significantly increase the system's debt burden. However, Moody's expects the increased debt burden to remain affordable if the City Commission continues to demonstrate its willingness to regularly raise rates as needed to accommodate the increased debt.

SATISFACTORY LEGAL COVENANTS

Moody's believes that the legal provisions for the current bonds should provide adequate security for bondholders. The current bonds are paid from a senior lien on the net revenues of the system. The rate covenant calls for net revenues that provide at least 1.20 times annual debt service coverage on senior lien bonds and 1.05 times annual debt service coverage on junior lien bonds. The rate covenant is adequate, although somewhat narrower than rate covenants of comparable systems. The resolution also includes an additional bonds test that requires that the system's net revenues in the preceding fiscal year equal at least 1.20 maximum annual debt service.

KEY STATISTICS

Fiscal 2005 number of customers: 29,770 (water) and 29,515 (sewer)

Fiscal 2005 net working capital: $55.5 million

Fiscal 2005 operating revenues: $24.7 million

Fiscal 2005 operating ratio: 49.4%

Fiscal 2005 net take down: 53.1%

Fiscal 2005 debt ratio: 37.6%

Post-sale debt outstanding: $44.7 million (senior lien debt)

Post-sale debt outstanding: $88.0 million (all debt)

Payout of principal and interest (10 years): 41% (senior lien debt)

Maximum annual debt service coverage (fiscal 2005 net revenues): 4.07x (senior lien debt)

Rate covenant: 1.20x (senior lien), 1.05x (junior lien)

Additional bonds test: 1.20x