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Rating Update:

MOODY'S AFFIRMS Aa2 RATINGS ASSIGNED TO WEST VIRGINIA'S SURFACE TRANSPORTATION IMPROVEMENT SPECIAL OBLIGATION NOTES

03 Nov 2010

STABLE OUTLOOK APPLIES TO $122.8 MILLION IN OUTSTANDING BONDS

West Virginia (State of)
State
WV

Opinion

NEW YORK, Nov 3, 2010 -- Moody's Investors Service has affirmed ratings of Aa2, with a stable outlook, on the State of West Virginia's $122.8 million of outstanding Surface Transportation Improvements Special Obligation Notes. The notes are secured solely by a pledge of anticipated federal highway aid grant revenues.

RATINGS RATIONALE

The rating reflects strong debt service coverage from pledged revenues, consisting solely of federal highway aid grant revenues, the availability (though not a pledge) of other state monies to pay debt service on the notes, a direct payment structure, and a strong additional bonds test. These strengths are partly offset by the risk of potential funding reductions upon future reauthorization of the federal highway aid program that could have a negative impact on projected pledged revenues.

Strengths:

- Good coverage of debt service by federal aid revenues

- Limits on additional debt issuance, including an additional bonds test requiring a minimum of 3 times projected debt service coverage

- Availability, though not a pledge of other state revenues

-Direct payment of federal aid to trustee to coincide with debt service payment dates

-History of broad national support for federal-highway aid program

- Relatively short note maturity of seven years

Challenges:

- Risk of changing national priorities leading to reduced federal funding over time

FINAL BOND ISSUANCE UNDER AUTHORIZING ACT REFLECTS PROGRESS IN STATE'S LONG TERM TRANSPORTATION PROGRAM

The Garvee bond program was used to fund the Statewide Transportation Improvement Program (STIP). The STIP outlines all federal aid projects scheduled within a three-year period. The authorizing legislation allowed for a $200 million cap on note issuance. The state issued the first notes under the authorizing act in October 2006 ($75.9 million), the second in April 2007 ($33.1 million), and the third and final in September 2008 ($74.8 million). The state currently has no plans on authorizing additional debt under this program. There were a total of five construction projects targeted for completion under STIP, to be funded with note proceeds.

ADDITIONAL BONDS TEST REQUIRES 3 TIMES DEBT SERVICE COVERAGE BY PLEDGED REVENUES

The master trust indenture for the program stipulates that additional notes may be issued only so long as Federal Highway Administration revenue available for debt service (based on aggregate FHWA funds received in the prior fiscal year) is at least three times the resulting maximum annual debt service. The additional bonds test (ABT) for West Virginia's program is comparable to those of other Aa3/stable rated programs. In general such provisions limit the risk that coverage will be eroded by debt issuance, but they do not address the possibility of reductions in the federal highway programs' overall level of funding or the share of federal highway money apportioned to the state.

PLEDGED FEDERAL REIMBURSEMENTS PROVIDES SUBSTANTIAL COVERAGE OF PROJECTED DEBT SERVICE

West Virginia has experienced significant growth in obligation authority from FFY 2009 to 2010 (43%), coverage of maximum annual debt service associated with total program issuance based on FFY 2010 obligation authority is a strong 12.5 times. When actual federal receipts are factored in, coverage increases to 14.5 times. West Virginia benefited from an unusually high number of federal transportation funding earmarks, which have caused actual annual federal receipts to exceed annual obligation authority, and have resulted in consistent increases in receipts each fiscal year since 2003. Moody's views coverage levels by obligation authority as the stronger coverage indicator, as actual federal receipts can be volatile due to the dependence on congressional earmarks.

STATE ROAD FUND AVAILABLE BUT NOT PLEDGED

The State Road Fund is a special revenue fund which almost exclusively funds the activities of the State Division of Highways. The state revenue component of the fund is mostly made up of fuel taxes, and accounted for roughly 60% of the entire fund for fiscal year 2010. In recent years, growth in the state revenue portion of the fund has been flat. In response, the legislature has recently implemented a number of cost containment and revenue boosting measures including the creation of the Motor Fuel Reserve Fund in 2009 which authorizes transfers from the general fund to the state road fund as frequently as monthly that may not exceed, in the aggregate, $40 million by the end of calendar year 2009. Because the road fund is the main source of funding for highway capital expenditures, continued revenue weakness may result in increased reliance on bonding to provide funding.

NOTES FEATURE A "DIRECT" PAYMENT STRUCTURE, WITH FHWA APPROVAL TO PAY DEBT SERVICE; PAYMENTS NOT SUBJECT TO STATE APPROPRIATION

The note program has been structured for direct reimbursement of pre-approved debt service payments under an agreement with the FHWA. The FHWA has agreed in a memorandum of agreement with the state to make payments for principal and interest costs, rather than for project cost. By seeking payment in this way, the department insulates note holders against the risk of failure to complete projects on time or on budget. The department has covenanted to seek obligation authority from the FHWA for the current federal fiscal year's principal and interest payments. This commitment provides protection against delays in federal appropriations.

The obligation to pay debt service from federal highway aid is unconditional, and not subject to appropriation by the state legislature. Within 5 business days of the March 1 and September 1 debt service payment dates, the trustee will directly bill FHWA in order to receive payment at least 4 business days in advance of debt service dates. The September 1, principal payment date provides eleven months of a timing cushion in relation to the start of the federal fiscal year (October 1)

RATING ALSO TAKES STRUCTURAL STRENGTHS INTO ACCOUNT

The rating assigned to the notes also recognizes structural features that increase bondholder security. The Commissioner of Highways has covenanted to submit a request to FHWA to partially convert an advance construction amount sufficient to pay scheduled debt service due within the federal fiscal year, and that this conversion will represent the first obligation of federal funds that must be made before any obligation for other state federal aid projects.

Although the Notes are not backed by a moral obligation pledge of the state, the Commissioner has covenanted and agrees that if the amount required to pay principal and interest on the notes for the next bond year is not included in the FHWA obligation by January 1 of each year that he shall notify the governor of such non-obligation and shall request the governor to submit a supplemental appropriation for such amount from the federal reimbursement money in the State Road Fund or from other funds legally available to the legislature.

Additionally, the comparatively short maturity of the notes (seven years) is a credit strength. The short maturity limits the notes' exposure to the federal reauthorization risk.

FEDERAL HIGHWAY PROGRAM HAS REAUTHORIZATION RISK

The Title 23 Federal Aid Highway Program, which is overseen by FHWA, requires periodic legislative reauthorization. The most recent reauthorizing law (the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, or SAFETEA-LU) was enacted in August 2005, almost two years after the expiration of the preceding multi-year package (the Transportation Equity Act for the 21st Century or TEA-21). During this period, the federal government continued to make Title 23 payments, via a dozen TEA-21 extensions. There was no impact on the flow of federal reimbursement money to states for the purpose of paying debt service. This underscored the broad support from which the federal aid highway program has long benefited. The current federal transportation funding authorization for SAFETEA-LU expired September 2009, and has been followed by a series of temporary funding extensions until a new permanent funding program is agreed upon.

Outlook

The outlook for West Virginia's Surface Transportation Improvements Special Obligation Notes is stable, based on Moody's expectation that the federal highway program will continue to be accorded high national priority, resulting in a continued sufficient level of federal aid revenue available.

What could move the rating up:

- Structural changes that strengthen the bond program, such as a stronger additional bonds test

What could move the rating down:

- Significant negative impact on the state's federal revenue expectations as a result of federal reauthorization or other changes in the federal highway aid program

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Kimberly Lyons
Analyst
Public Finance Group
Moody's Investors Service

Lisa Heller
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S AFFIRMS Aa2 RATINGS ASSIGNED TO WEST VIRGINIA'S SURFACE TRANSPORTATION IMPROVEMENT SPECIAL OBLIGATION NOTES
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