Moody's Investors Service said it has downgraded to A3 from A1 the rating on $36.2 million in Berkeley County Public Service District, W.Va., outstanding rated parity debt; the outlook has also been revised to negative.
Moody's assigned an A3 rating and negative outlook to the district's $7.5 million water refunding revenue bonds, Series 2012A and $7.7 million water revenue bonds, Series 2012B.
The bonds are secured by a net revenue pledge of the district's water treatment and distribution system. Proceeds from the Series 2012A bonds will be used to refund the Series 2004 bonds for an estimated net present value savings of $864,100, or 11.3% of refunded principal, with no extension of maturity.
The refunding will also help to smooth the district's debt service schedule, which previously spiked in fiscal 2018 and fiscal 2019. Proceeds from the Series 2012B bonds will be used to fund the construction of various water mains and pumps, as well as new administration and maintenance facilities.
The downgrade to A3 from A1 primarily reflects the district's weakened financial position, highlighted through decreased coverage and liquidity levels that resulted in the district not meeting its rate covenant (rate covenant of 1.2 times; coverage of 1.15 times) in fiscal 2012.
The rating also reflects the district's sizable and stable customer base, adequate legal provisions, lack of long-term financial planning, as well as above-average debt position, which is expected to decrease going forward due to an absence of additional debt plans in the near-term.
The assignment of the negative outlook reflects the future challenges the district faces in both meeting and exceeding its rate covenant, and increasing its liquidity position to provide additional financial flexibility.
Moody's believes this will remain a challenge due to the required approval from the West Virginia Public Service Commission (PSC) for any proposed rate increases. While PSC has shown a willingness to raise rates for the district in the recent past (10.5% in fiscal 2010 and 1.5% in fiscal 2014), the process can take up to 13 months before a rate has been approved, implemented, and the district is able to collect the additional revenues that are needed.
In addition, in May 2012, the PSC discontinued the district's collection of capacity fees, as the district no longer met the growth criteria required to collect such fees. These fees secure debt service payments on the district's Series 2007 bond anticipation note, which the district now plans to refund in fiscal 2013 and fiscal 2014 into long-term debt.
This proposed increase in debt service and the loss of capacity fees will make it even more challenging for the district to increase coverage and liquidity, particularly if additional rate increases are not adopted by PSC in a timely manner.
Going forward, Moody's will monitor PSC's willingness to implement future rate increase for the district, as well as the district's ability not only to meet its rate covenant, but to increase its debt service coverage and liquidity position as well.