BRADENTON, Fla. - Standard & Poor's downgraded Pineville, La.'s utility revenue bonds to A-plus from AA-minus on citing "sizeable" budget transfers.
The outlook is negative, S&P said in an Oct. 15 report.
"The downgrade and negative outlook reflect the sizable increase in transfers out to the general fund following multiple years of declining fund balances," said analyst Alexander Vargas. "Currently, the utility is operating on a deficit after transfers and the city has yet to present a plan for offsetting losses."
In fiscal 2014, the utility transferred $1.8 million to the general fund - double the amount transferred in fiscal 2012.
The 2009 utility bonds rated by S&P are secured by the net revenues of the water and sewer system.
Following several years of operating deficits, the city's fund balance has declined 80% since fiscal 2010 to $706,797 for fiscal 2013, according to Vargas. As a result, the general fund has relied heavily on transfers, such as $1.8 million from the utility fund, which was an increase of $900,000 from transfers in 2011.
"A rate study is ongoing to determine how much rates must be increased to allow the utility to continue to subsidize the general fund," said Vargas.
Total debt service coverage was 1.39 times in fiscal 2013, but decreased to inadequate levels when accounting for transfers made to the general fund, he said.
The system's total cash position declined $547,602 for fiscal 2013. Unaudited fiscal 2014 results indicate strong coverage of over 2 times but still inadequate coverage when considering transfers out.
The utility maintains a strong liquidity position with $5.05 million in unrestricted cash providing more than a year's cash on hand, S&P said.
The system serves about 5,000 customers with no concentration among any major users. The system owns and operates a 4.5 million-gallon-per-day wastewater treatment facility. Management has identified $150,000 in capital projects, which it plans to fund with working capital. There are no plans to issue additional debt.
"The negative outlook reflects our opinion that deficit spending will continue for fiscal 2015 given that the city has yet to adopt rate increases to offset the loss due to significant transfers to the general fund," Vargas said. "Management has indicated that it is taking no measures to decrease the need for transfers to the general fund, so we expect for transfers to at least reflect fiscal 2014 levels in the future."
S&P said that if the utility continues to operate with inadequate debt service coverage, it will place further downward pressure on the rating.
Pineville, with an estimated population of 15,200, is primarily a bedroom community adjacent to the city of Alexandria, in the center of the state.
