Fitch Affirms West Virginia Water Development Auth Rev Bonds at 'AA-'; Outlook Stable

Fitch Ratings affirms the 'AA-' rating on approximately $104.28 million of water development revenue bonds issued by the West Virginia Water Development Authority (the authority) as follows:

-- (Loan Program I) 2012 series A-I and series B-I;

-- (Loan Program II) 2012 series A-II and series B-II and 2013 series A-II;

-- (Loan Program III) 2012 series A-III(AMT) and series B-III (AMT).

In addition, Fitch affirms approximately $25.6 million in outstanding authority infrastructure revenue bonds (West Virginia infrastructure and jobs development council program [IJDC] bonds) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

Revenue bonds of the authority are to be repaid from local government borrowers' pledge of system revenue. Reserves are cash-funded at maximum annual debt service (MADS), and in the event of a draw on any bond reserve fund, the authority pledges to seek a state legislative appropriation for reserve replenishment. This moral obligation of the state provides the basis for the rating.

KEY RATING DRIVERS

STATE RESERVE FUND REPLENISHMENT MORAL OBLIGATION: The authority pledges to seek a state appropriation to replenish bond reserves if reserves fall below MADS requirements.

PROVEN STATE SUPPORT AND STRONG REPAYMENT HISTORY: The authority's programs have a solid history of debt repayment and the state of West Virginia (general obligation [GO] bonds rated 'AA+', Stable Outlook) has a demonstrated history of support for and involvement with the authority's programs.

RATE-SETTING INTERVENTION AND LOCAL RESERVE FUNDS: The authority is statutorily authorized, subject to the approval of the public service commission, to adjust utility rates for any local borrower in the event of a failure to pay on the borrower's obligations to the authority. The provision of individual reserve funds for each local borrower, except for certain loans in the separate loan program III that maintain operations and maintenance agreements, provides a source of funds prior to requiring the use of any bond reserve fund monies.

IMPORTANCE OF AUTHORITY TO THE STATE: The authority was established in 1972 to serve as a loan provider and revenue bond bank for construction of wastewater and water facilities for West Virginia's municipalities, public service districts, and other local providers of these services. Bonds covered by the state's moral obligation pledge are integral to the provision of clean water in the state and represent a diverse geographic range of local governments.

RATING SENSITIVITIES

The ratings are sensitive to movement in the state of West Virginia's GO bond rating to which they are linked.

CREDIT PROFILE

The 'AA-' ratings on the authority's revenue bonds, two notches below the state's GO rating, reflect the provision of multiple layers of security for bond repayment, with the strongest support provided by the state of West Virginia's moral obligation pledge to replenish the authority's debt service reserve funds, set at MADS under each loan program, should any be utilized due to a borrower default. Authority enhancements are added to each individual local borrower's revenue bond pledge, including the ability to raise utility rates, subject to the approval of the public service commission, and a borrower-level debt service reserve fund set at MADS. To date, no local government borrower has defaulted on a loan repayment under this program that required a draw on the authority's reserve funds, although negligible use of local reserve funds has occurred. As a result, the moral obligation mechanism has not been needed.

The authority was established in 1972 to assist West Virginia local governments as they sought to improve water quality, abate water pollution, and improve wastewater treatment. Total authority obligations secured by the moral obligation pledge to be outstanding at any one time may not exceed $500 million. Provided that before the authority issues bonds or notes in excess of $400 million, approval must be granted by the state legislature. The authority's debt service reserves are fully funded at MADS under each individual loan program.

Pledged revenues are generally net utility system revenues and are supported by borrower reserve funds equal to MADS. The borrowers have also agreed to rate covenants of 1.15x MADS when the local reserve is not fully funded; 1.10x with a fully funded reserve, as well as funding of a 2 1/2% gross revenue renewal and replacement fund that is also available to replenish draws from the reserve fund. Borrowers make monthly debt service payments to the state bond commission, the fiscal agent for these bonds, with payments transferred one month prior to debt service on the bonds to the trustee, providing sufficient time for the authority to be notified of any delinquencies. Under the IJDC bond issue, monthly borrower payments are transferred on a quarterly basis to the trustee.

Per Fitch's guidelines for rating moral obligations, the state's commitment replaces the credit quality of the underlying securities in determining the rating on the bonds. The moral obligation mechanism calls for the authority to notify the governor of any deficiency in the authority's debt service reserve fund and the governor may request that the legislature appropriate funds to replenish it, although the legislature is not obligated to do so. The state has a demonstrated commitment to the programs of the authority as this agency is its primary administrator of the state's clean water and clean drinking water programs for local governments in the state, including the revolving funds established under the respective federal acts. Oversight of the authority is provided by the state water development board, composed of seven members including the governor, the secretary of the department of environmental protection, and the commissioner of the bureau of public health or the ex officios' designees as well as four gubernatorial appointees.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Tax-Supported Rating Criteria'(Aug. 14, 2012);

-- 'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

-- 'Rating Guidelines for Moral Obligations'(April 18, 2013).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Rating Guidelines for Moral Obligations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704882

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=907394

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