Moody's Investors Service said it has downgraded the city of Ukiah, Calif.'s sewer district revenue bond rating to Baa1 from A2 affecting $71.9 million in outstanding debt.

The bonds are secured by the net revenue of the district's sewer system. Concurrently, Moody's has revised the outlook to negative from positive.

The downgrade to Baa1 from A2 rating reflects the district's reliance on unexpended bond proceeds and capitalized interest to meet the rate covenant in fiscal 2011 and 2012 and the use of the rate stabilization fund in 2013.

The rating also reflects strong reserve levels, the essentiality of the service, and a large rate increase in fiscal 2013.

The outlook revision to negative from positive reflects the expectation of narrowing coverage levels in fiscal 2012 and 2013 and the necessity to use reserves to meet the rate covenant. Future rating reviews will consider the district's ability to meet and maintain its coverage levels in line with its rate covenants through net revenues.

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