Fitch Affirms Central Utah Water Conservancy Dist, UT Water Rev Bonds; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the following ratings for the Central Utah Water Conservancy District, UT (the district) bonds:

--$400.6 million water conservancy revenue bonds series 1998B, 1998C, 2005B, 2010A, and water revenue bonds series 2011A, 2012B, 2012C at 'AA+';

--$56.1 million water conservancy revenue bonds series 2008 B-2 (issued by the Utah Water Finance Agency; UWFA) at 'AA+'; and

--$13.1 million water conservancy Jordanelle hydroelectric revenue refunding bonds series 2012A (subordinate lien) at 'AA'.

The Rating Outlook on all bonds is Stable.

SECURITY

The water conservancy district's revenue bonds and the series B2 bonds issued by the UWFA are secured by gross revenues of the district's water system. The district has covenanted to pay operations and maintenance costs from its ad valorem tax revenues, the excess of which is available but not pledged to the payment of revenue bonds.

The series 2012A bonds are secured by a subordinate lien on the district's water revenues in addition to electric revenues from the Jordanelle hydroelectric project. Electric revenues are sufficient to support the debt service. However, the 'AA' rating reflects the double-barrel pledge of the subordinate lien of the district's water revenues.

KEY RATING DRIVERS

LARGE REGIONAL WHOLESALE SUPPLIER: The district is the largest regional wholesale water supplier in the state of Utah, serving a customer base of 1.7 million people or 62% of the state population through sales to retail suppliers across 10 counties.

STRONG FINANCIAL PERFORMANCE: The district's overall financial performance is strong with robust liquidity and all-in debt service coverage (DSC) for wholesale provider.

CHANGING REVENUE MIX: The revenue mix will change as water revenues are projected to grow, reducing relatively stable (although not pledged) property and motor vehicle tax receipts. The impact of such changes should be credit neutral due to take-or-pay water supply contract terms.

LARGE CAPITAL INVESTMENT UNDERWAY: The district's Central Water Project (CWP) is proceeding through the heavy construction phase. Costs have been lower than anticipated and the district does not expect to issue additional debt until fiscal 2017.

RATING SENSITIVITIES

LOWER WATER DEMAND: The district's financial forecast depends on regional growth and resulting demand for the CWP water supply. Longer-term credit pressures could surface if projected growth in water demand falls short of robust yet seemingly reasonable expectations.

CREDIT PROFILE

The district manages water resources to meet the water requirements of approximately 1.7 million people (approximately 62% of Utah's population). In addition to operating three water treatment plants, the district manages two water resource development projects: the Bonneville Unit of the Central Utah Project (CUP) and the CWP.

The CUP is a large, primarily federally funded, water project that has enabled Utah to beneficially use a substantial portion of its allotted share of Colorado River water. The district has a limited obligation to provide local matching funds to support the completion of a final component of the Bonneville Unit of the CUP. The other component of the district's capital plan is the CWP, which consists of water development, conveyance, and treatment facilities that are separate from the CUP.

TAX REVENUES PROVIDE STABILITY TO DISTRICT REVENUES

Tax revenues provided 70% of revenues in fiscal 2014, based on unaudited financials. Tax revenues are used to pay O&M costs of the district's water system, federal contract amounts and debt service on the district's general obligation (GO) bonds. While not pledged, remaining tax revenues after these payments are available and legally permissible to be applied toward payment on water revenue bonds.

The district increased its tax levy in 2009 to the maximum allowable cap of $0.0004 per dollar of taxable assessed value (TAV) to begin to generate additional revenues for anticipated debt and capital spending. The result was a strong increase in tax revenues in fiscal 2010. As TAV has declined annually since 2009, the district increased its levy above the cap in order to hold revenues stable, as permitted by Utah code.

As the district ramps up sales from the CWP, water sales will become a more prominent percentage of revenue. Water sales are expected to provide around 40-45% of revenues beginning in fiscal 2015, when a full year of water sales from the CWP will occur. The changing revenue mix is not expected to result in a change to credit quality, given the fact that water sales agreements are already in place for the CWP water and are take-or-pay in nature, providing revenues that cover district costs, regardless of whether or not the purchasers use their full allocation of the water.

LARGE CAPITAL INVESTMENT UNDERWAY

The capital costs associated with the CWP are approximately $158 million over the next five years. The combined projects in the plan are expected to provide approximately 54,000 acre feet (af) of culinary water and 10,500 af of secondary water. Contractual rights have been sold under take or pay agreements for 42,090 af of the culinary water from the project. Large deliveries began in July 2014 to the Jordan Valley Water Conservancy District for its 11,680 af share.

Another 22,500 af are scheduled for sale to the growing cities of Saratoga Springs and Eagle Mountain in 2019. The cities are growing communities and are required to pay large development fees upon first delivery of the water, which must occur by 2019. The development fees due from the purchasers based on their contracted amounts will not change with actual usage and are designed to be sufficient to pay rising debt service costs associated with the project over the next five years.

STRONG FINANCIAL PERFORMANCE AND RESERVE LEVELS

Fitch calculated all-in DSC (including tax receipts as revenues and GO debt service) was 1.38x in fiscal 2013. All-in DSC is projected to remain at this level in fiscal 2014, based on unaudited financials, and recover to 1.6x or higher thereafter. Fiscals 2013 and 2014 represent a tightening of financial margins since water sales from the CWP were not yet occurring but total debt service had already increased.

Forecast performance is reliant on additional CWP water sales already under contract. While the assumptions appear reasonable given the terms of signed contracts and known water needs of the purchasers, the water needs of the purchasers are reliant on future anticipated growth.

Fitch's numbers do not include spending within the Central Utah Project fund. Revenues for the CUP are received from the federal government via a federal allocation. The district is responsible to funding a 35% match portion and may elect to advance additional cash in order to keep construction on pace at the project. The district's spending has exceeded its local match share in recent years and it has cash reserves to finance the difference.

The district has very strong liquidity levels, as revenues have been increased in anticipation of capital spending and increasing debt costs. Liquidity of $13.6 million of general fund unrestricted cash and investments at the end of fiscal 2014 equaled 299 days operating cash. However, if the $62 million in legally unrestricted funds in the capital fund are included, the days operating cash is exceedingly high at 1,658 days cash. The district anticipates spending the capital fund down over the next few years as it moves through the heavy construction phase of its capital plan.

To mitigate volatility of coverage levels during its capital plan, the district's 2010A taxable revenue bond indenture requires a debt service coverage maintenance fund (CMF) equal to 150% of debt service due on the revenue bonds in any fiscal year. The fund had $12 million at the end of fiscal 2013 and an estimated $17 million at the end of fiscal 2014. It is required to reach $20 million by fiscal 2016, for use through fiscal 2021, coinciding with the district's completion of the CWP. The CMF is not included in the unrestricted cash amount above. The fund mitigates concern over lower debt service coverage levels in fiscals 2013 and 2014.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria'(July 31, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890194

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Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-37
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations;
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-37
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations;
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com