BRADENTON, Fla. — Moody’s Investors Service Monday upgraded the Birmingham Water Works Board’s senior revenue bonds to Aa2 from Aa3 and its subordinate bonds to Aa3 from A1.
The action affects $792.2 million of outstanding senior-lien revenue bonds and $393.8 million of subordinate bonds. The outlook is stable.
The upward rating action comes as the board prepares to sell $137.8 million of senior revenue bonds in early June. In the process of approving the deal, some board members expressed concern about selling the bonds as early as possibly due to the worsening of Jefferson County’s financial situation. Birmingham is the county seat.
The “upgrades reflect the board’s prudent fiscal management and healthy financial position, marked by solid reserves and debt service coverage,” said analyst Christopher Coviello.
“The ratings also take into account the large, stable service area and high, but manageable, debt burden.”
Water system revenues exceeded the budget by an estimated $7 million and expenditures were under budget by around $5 million, according to unaudited results for the Dec. 31 year-end, Coviello said. Net income is projected to be $7.58 million due primarily to a 12% increase in water sales over 2009.
Unaudited maximum-annual debt service on senior-lien bonds was 2.16 times in fiscal 2010 and 1.22 times on both senior- and subordinate-lien bonds. The system’s reserves improved by an estimated $15.19 million, or 70.22%.
“Annual rate increases, including a 13.2% increase in 2009, 6.9% increase in 2010 and a 6.9% increase in 2011, have allowed the board to improve its financial position,” Coviello said.
The water board has 200,620 customers within its 759-square-mile region, which covers much of Jefferson County.
The water system suffered minor damage from the deadly storms and tornados that struck Alabama in late April. The board estimates the cost of debris removal and repairs to be under $5 million. Up to 75% is expected to be reimbursed by the Federal Emergency Management Agency while the board has $5 million of insurance in a contingent business income policy.
The bonds will finance various capital projects and a cash deposit into the debt-service reserve fund. Morgan Keegan & Co. is the book-runner.
The bonds are expect to sell to retail investors on June 6 with institutional sales on June 7.
Standard & Poor’s assigned its AA-minus and stable outlook to the bonds. The agency also affirmed its AA-minus rating on outstanding senior bonds and A-plus on subordinate bonds.
The rating upgrade is expected to have a positive effect on pricing, said Matthew Arrington, assistant vice president with Sterne Agee & Leach Inc., the water board’s financial adviser.
“We definitely have to give a lot of accolades to the board for the decisions it makes to maintain a well-rounded system and management that has been in place almost 10 years,” he said.
Jefferson County needs to cut $80 million from its general fund due to the recent loss of a major tax revenue source and it has defaulted on $3.2 billion of outstanding variable- and auction-rate sewer debt.
“There were some concerns with the county even though [the Water Works Board and the county’s sewer system] are two separate entities,” Arrington said, adding that he expects the situation will have “little to no effect” on the board’s upcoming financing.
Arrington said a $94.5 million refunding by the water board last November “sold well.” It was issued as $86.97 million of Series A bonds and $7.5 million of taxable Series B bonds. The A bonds priced to yield 3.28% in 2020, 4.04% in 2024, and 4.5% in 2029.
