Moody's Investors Service downgraded to A2 from A1 the rating on the Three Valleys Municipal Water District's 2003 refunding revenue certificates of participation. The downgrade affects $11.38 billion of debt.

Moody's analysts said the downgrade stems from the district's declining debt-service coverage and increasingly narrow operating margin, as the district has not enacted rate increases sufficient to pass on Metropolitan Water District of Southern California rate hikes to retail members.

It also incorporates the district's strong ratio of unrestricted cash relative to the total amount of remaining debt service, adequate financial flexibility, short term-to-debt maturity and the large and diverse service area of eastern Los Angeles County.

The retail rates are not set sufficiently high to compensate for operational risks and unanticipated pressures, according to Moody's.

The certificates are secured by installment payments payable to the water district's financing corporation that are derived from the net revenues of the district.

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