New York, December 07, 2012 -- Moody's Rating

Issue: Water System Improvement Revenue and Refunding Bonds, 2012; Rating: Aa3; Sale Amount: $9,215,000; Expected Sale Date: 12-17-2012; Rating Description: Revenue: Government Enterprise

OPINION

Moody's Investors Service has assigned an initial Aa3 rating and negative outlook to the Covington Water District, Washington Water System Improvement and Revenue and Refunding Bonds, 2012. The bonds are secured by a first lien pledge of net revenues of the district's water system, including connection and Utility Local Improvement District (ULID) fees. The current offering will refund the entirety of the district's outstanding senior lien debt, as well as fund various projects in accordance with the district's capital improvement plan.

SUMMARY RATING RATIONALE

The district's Aa3 senior lien rating primarily reflects a strong liquidity profile and favorable historical senior lien debt service coverage with large subordinate obligations which significantly narrow total debt service coverage. The rating also incorporates a modestly-sized but sound service area, a history of regular rate increases resulting in relatively high utility rates, and optimistic district medium-term projections relying on substantial service and connection revenue increases.

The negative outlook reflects stressed coverage projections in the near term, and rely on outsized service and connection revenue growth in the medium term. Despite management's credible assurance of corrective action, current budgeted expectations indicate fiscal 2013 total debt service coverage, including subordinate state loans, decreasing to below sum-sufficient, absent a restructuring of some subordinate debt or a mid-year rate increase. The outlook also factors in the conversion of a large subordinate loan to a contract resource obligation, which lowers senior lien debt service coverage. Additionally, while district liquidity would remain very healthy following a modest draw on the district's rate stabilization fund, total debt service coverage falling below sum sufficient would require an unplanned draw on reserves and create considerable downward ratings pressure.

STRENGTHS

- Strong liquidity profile

- Favorable senior lien debt service coverage

CHALLENGES

- Significant anticipated increases in subordinate obligations attenuates strong historical senior lien debt service coverage

- Conversion of a large subordinate loan to a contract obligation lowers senior lien debt service

- Relatively high water rates for a Northwest water provider constrains district's ability to improve debt service coverage solely from rate increases

WHAT COULD MAKE THE RATING MOVE UP (remove the negative outlook)

- Timely improvements in total debt service coverage levels without significant liquidity draws

- Maintenance or growth in connections and operations while sustaining the diversity of the customer base

WHAT COULD MAKE THE RATING MOVE DOWN

- An unplanned draw on cash reserves to supplement insufficient net revenues within the medium-term

- Near-term coverage of senior and total debt service approximating recently revised projections

- Significantly slowed revenue growth relative to district projections, or a trend of weakening debt service coverage

- Near term rate adjustments do not result in debt service coverage levels above current projections

- Significant deterioration in cash reserves

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratingspublished in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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Bryan A. Quevedo Analyst Public Finance Group Moody'sInvestors Service, Inc.One Front Street Suite 1900 San Francisco, CA 94111 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653William Oh Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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