15.11.2012 16:48
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Houston (City of) TX -- Moody's assigns Aa2 rating and stable outlook to the City of Houston's (TX) $162 million Combined Utility System First Lien Revenue Refunding Bonds, Series 2012F

Aa2 rating affects $5.6 billion in outstanding parity debt

New York, November 15, 2012 --

Moody's Rating

Issue: First Lien Revenue Refunding Bonds, Series 2012F; Rating: Aa2; Sale Amount: $161,970,000; Expected Sale Date: 11/22/2012; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has assigned a Aa2 rating and stable outlook to the City of Houston's [TX] $162 million Combined Utility System's Revenue Refunding Bonds, Series 2012F. At the same time, Moody's has affirmed the rating on the system's $5.6 billion in outstanding debt. Additionally, Moody's has affirmed the Aa2 and stable outlook on the System's Prior Lien Revenue Bonds affecting $239 million in outstanding debt.

SUMMARY RATING RATIONALE

The bonds are secured by net revenues of the utility system with the first lien subordinate to the prior lien. The prior lien is closed and no additional debt can be issued on the lien which is a credit strength. The ratings reflect the utility's essential role as the primary water provider to the growing Houston metropolitan region, a strong balance sheet and historically adequate debt service coverage, a sizable capital improvement plan and adequate bond covenants.

The stable outlook reflects the improvement in debt service coverage for fiscal 2011 driven by significant rate increases implemented in June of 2010 and projections for healthy debt service coverage again in fiscal 2012. The stable outlook also reflects resolution of the rate validation ruling in the city's favor.

STRENGTHS

Large, expanding service area, dominating the Houston MSA

Automatic process to implement PPI-based annual rate increases

Closed loop flow of funds, resulting in a strong balance sheet

Improvement in debt service coverage

CHALLENGES

Rate limitations could pressure operating margins

High debt position expected to continue given infrastructure demands

Significant VRDO and swap exposure

Outlook

The stable outlook on the first lien (subordinate lien technically) reflects improved debt service coverage for fiscal 2011 and projected for fiscal 2012 with a pro-forma that indicates coverage will remain stable going forward. The stable outlook also takes into consideration resolution of the rate validation lawsuit. The stable outlook on the systems' Prior Lien Revenue Bonds reflects the bondholder security provided by the closed lien and strong coverage levels.

WHAT COULD MAKE THE RATING GO UP

Improvement in debt service coverage closer to or over 2.0 times

Stronger level covenants

A substantial improvement in the debt ratio

WHAT COULD MAKE THE RATING DO DOWN

Significant deterioration in cash balance

Return to weak debt service coverage levels

A material increase in leverage

RATING METHODOLOGY

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody'sInvestors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Kristin Button Vice President - Senior Analyst Public Finance Group Moody'sInvestors Service, Inc.600 North Pearl Street Suite 2165 Dallas, TX 75201 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Edward Damutz VP - Senior Credit Officer Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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