OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following Central Utah Water Conservancy District, UT (the district) revenue bonds:

--Approximately $26,040,000 water revenue refunding bonds, series 2016A.

The bonds will be sold via negotiation the week of July 7. Proceeds will be used to refund a portion of the district outstanding water revenue bonds for level interest-cost savings and pay for cost of issuance. No debt service reserve will be established for the bonds.

In addition, Fitch affirms the following bonds:

--$396.5 million water conservancy revenue bonds series 1998B, 1998C, 2010A, 2011A, 2012B, 2012C (pre-refunded) at 'AA+';

--$55.3 million water conservancy revenue bonds series 2008 B-2 (issued by the Utah Water Finance Agency; UWFA) at 'AA+'; and

--$12.8 million water conservancy Jordanelle hydroelectric revenue refunding bonds series 2012A (subordinate lien) at 'AA'.

The Rating Outlook on all bonds is Stable.

SECURITY

Water revenue bonds issued by the district and by the UWFA are secured by gross revenues derived solely from water sales of the district's water system. The district's levy of an ad valorem tax provides additional revenue available to satisfy the payment of debt service on water revenue bonds only after the payment of operating and maintenance costs of the district, and debt service on outstanding general obligations bonds (GOs; rated 'AAA'/Stable).

The district's series 2012A hydroelectric revenue bonds are secured by a subordinate lien on the district's water revenues in addition to electric revenues paid from the Jordanelle hydroelectric project. Electric revenues provided by Heber Power & Light have been sufficient in the past 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 eight counties.

STRONG FINANCIAL PERFORMANCE: The district's overall financial performance has been strong, with robust liquidity and sufficient debt service coverage (DSC) on all system-supported debt.

CHANGING REVENUE; PROJECTED GROWTH: The revenue mix will change, as water revenues are projected to grow, reducing the district's reliance on relatively stable (although not pledged) property and motor vehicle tax receipts to fund its operating costs. The impact of such changes should be credit neutral due to take-or-pay water supply contracts, although longer-term credit pressures could surface if growth projections fall short of robust yet seemingly reasonable expectations.

SLOWDOWN IN CAPITAL INVESTMENT: While the district's Central Water Project (CWP) requires additional capital investment in the long term, the district has been able to slow down the pace of construction spending. Capital improvement plan (CIP) construction costs have been reduced and future debt issuances are being delayed.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL MARGINS: Maintenance of the Central Utah Water Conservancy District's strong financial position is key to supporting the 'AA+' rating. Failure of water revenues to materialize as anticipated could pressure the ratings.

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 about 60% of revenues in fiscal 2015, based on audited 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 G) bonds. While not pledged, remaining tax revenues after these payments are legally available for the payment of water revenue bond debt service.

The district levies the maximum allowable cap of $0.0004 per dollar of taxable assessed value (TAV), and has done so since 2009, to generate revenues for debt and capital spending. As TAV experienced some contraction during recessionary years, the district increased its levy above the cap in order to hold revenues stable, as permitted by Utah code.

Historically, water sales have made up 20% - 25% (fiscal years 2011 to 2014) of total district revenues. As the district ramps up sales from the CWP, water sales are becoming a more prominent percentage of revenue and for fiscal 2015 provided about 40% of revenues. 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.

DECELERATION OF CWP CAPITAL EXPANSION

The capital program costs associated with the CWP are approximately $60 million over the next five years, down 60% from the prior year's spending plan. CWP water deliveries are being made, but management is scaling back construction related to water source development projects, and other water storage projects included in the CWP. This easing off of capital spending has also allowed the district to postpone $136 million in revenue bonds that were previously planned for fiscal 2017 and 2019.

The total cost estimate for completion of the CWP stands at $465 million with project completion anticipated in 2045. 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 42,106 af of the culinary water from the project. Initial water deliveries started in July of 2011 with deliveries growing larger in scale annually.

In July 2014 Jordan Valley Water Conservancy District (water revenue bonds rated 'AA+') began receiving 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 derived from net revenues, which includes tax receipts and hydroelectric sales, remained solid at 1.7x in fiscal 2015. Total revenues included a significant amount ($14 million) of one-time development fee connections; however, coverage was still satisfactory at 1.3x when excluding development fee revenues. Revenue solely from water sales provided healthy debt service coverage of 1.8x on a gross basis.

Management's forecast appears reasonable in Fitch's view, pointing to all-in DSC growing from 1.7x in fiscal 2016 to 5.7x by fiscal 2020 when the 22,500 af of water deliveries related to Saratoga Springs and Eagle Mountain is anticipated to start. 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, purchaser's needs are reliant on future anticipated growth.

Fitch's calculations 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.

LIQUIDITY BOOSTED BY RATE INCREASES

The district has very strong liquidity levels, as revenues have been increased in anticipation of capital spending and increasing debt costs. The annual water fee per af has increased by about 4.5% annually since fiscal 2009. One-time development charges for blocks of water removed from reserved status (development fees) have grown at a larger rate. Development fees saw 12% and 11% increases in fiscal years 2011 and 2012, respectively. Prospectively, development fees are projected to see 2.5% annual increases, while water fees will continue to see 4.5% annual adjustments.

District liquidity for fiscal 2015 totaled $105 million, including over $90 million in the capital project fund, up from $36 million in fiscal 2011. The district anticipates spending down the capital fund over the next few years as it plans to cash-fund at least the next five years of capital projects.

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. As of fiscal 2015, the fund totaled the required $20 million. The CMF is not included in the unrestricted cash amount above.

JORDANELLE HYDROELECTRIC PROJECT

Electric revenues from the Jordanelle Hydroelectric project are pledged to bondholders. The 12 megawatt (MW) hydroelectric project began commercial operation in July 2008. Full output of the facility is sold under a take-and-pay contract with Heber Power & Light (electric revs rated 'A+'), which requires Heber to pay for all energy produced by the project but payment is not required in the event of a project outage. Under average water conditions, the fixed rate per kilowatt hour (kWh) required to be paid by Heber is sufficient to cover the full costs of the project, including debt service on the series 2012A bonds and the UWFA series B2 bonds.

Above-average hydrological flows from 2008 through 2013 resulted in excess cash flows which the district used to pay down $6 million in debt. The $3 million cash reserve is required to be in place for the life of the debt to provide sufficient cash, if needed, to provide a minimum of 1.75x DSC on project-related debt. Excess cash flow, as long as the $3 million reserve fund is fully funded, must be used to pay down project-related debt.

Three years of drought conditions has resulted in below-average hydrological flows and reduced hydropower sales. Reduced power sales coupled with growing annual debt service costs on Jordanelle related debt will likely result in the district utilizing transfers from its reserve funds to maintain 1.75x coverage.