Moody’s Affirms Jefferson County, Ala.’s $3.25 Billion of Sewer Warrants

BRADENTON, Fla. — Moody’s Investors Service on Thursday affirmed the A3 rating and stable outlook on Jefferson County, Ala.’s $3.25 billion of sewer revenue warrants. The action reflects the system’s sizable user base with limited growth expectations, significant progress completing the 12-year, $2.4 billion capital improvement plan, annual rate increases, and debt service payments increasing substantially in coming fiscal years, said a Moody’s report by analyst Robyn Rosenblatt.“We’re pleased [with the affirmation] and I believe it’s going to save us a lot of money over the life of the bonds,” said Danny Panos, the county’s finance director. Panos said county officials met with rating agencies recently to discuss the debt portfolio.The county began a massive sewer replacement program in 1996 after entering into a consent decree with the U.S. Environmental Protection Agency and nearly 99% of consent decree-related projects are now completed, Rosenblatt said.The system’s future financial flexibility is somewhat constrained by the back-loading of principal debt service, which peaks at $271 million in 2038, as compared to 2008 debt service of $133 million, Rosenblatt said.The indenture covenants include provisions that increased security for bondholders as of Oct. 1, 2007, which require the county commission to automatically increase rates no later than Jan. 1 of each fiscal year to meet financial covenants.While the use of bond-related cash, including the capitalized interest account, resulted in reductions in net working capital of $457 million at the end of fiscal 2006, Rosenblatt said cash balances remain strong.A financial audit of fiscal 2006 water and sewer services was recently completed by a private firm that is expected to result in balance sheet adjustments primarily related to fixed asset calculations and categorization of various items, Rosenblatt noted. “The audit had some comments and suggestions for improvements and we are working on those,” Panos said. “The commission has asked us to respond by the end of January in writing to the auditor’s comments.”Rosenblatt said Moody’s viewed the hiring of an outside auditing firm as a positive step. “We think that’s very favorable as well as the fact that the commission talked about it in public and addressed it in a timely fashion.”The water and sewer system has 14 swaps outstanding, covering a notional amount of $5.1 billion and comprised of $3.1 billion of interest-rate swaps and $1.9 billion of basis swaps. As of Aug. 31, the swap valuation reflected a negative mark-to-market of $77 million.“Moody’s believes that the county’s use of derivatives to manage its debt portfolio does not present undue risks for bondholders, but notes that under certain scenarios, the county’s financial stability could be impacted by the need to post collateral within a short time-frame or by cost increases driven by the basis risk introduced by the swaps,” said Rosenblatt.The rating review comes as the Securities and Exchange Commission continues to delve into Jefferson County’s huge swap program and follows the SEC’s revelation last week that former county commissioner Larry Langford, now mayor of Birmingham, and a local securities dealer refused to give testimony in response to subpoenas they received.Rosenblatt had no comment regarding the SEC review. Panos said that county officials also met with Standard & Poor’s recently, but have not received a rating update. As of Dec. 20, Standard & Poor’s assigned an A rating to the county’s sewer warrants. The sewer warrants are not rated by Fitch Ratings.