Fitch Ratings assigns an 'AA' rating to the following Central Utah Water Conservancy District, UT (CUCWD) bonds:
--Approximately $10.56 million Jordanelle Hydroelectric revenue refunding bonds (subordinate lien), series 2012A.
The bonds are expected to price on May 22, 2012. Proceeds will be used to refund outstanding variable rate demand bonds, series B4, issued by the Utah Water Finance Agency on behalf of the district and to pay cost of issuance. The primary goal of the transaction is restructuring a portion of the outstanding series to fixed rate debt. The series 2012A bonds will have a standard debt service reserve, funded by bond proceeds.
In addition, Fitch affirms its outstanding ratings on the following bonds:
--$318.2 million water conservancy revenue bonds at 'AA+';
--$57.5 million water conservancy revenue bonds, series B2 (issued by the Utah Water Finance Agency; UWFA) at 'AA+';
--$23.2 million water conservancy Jordanelle hydroelectric revenue bonds, series B4 (subordinate lien; issued by the UWFA) at 'AA' (a portion of which will be refunded by the series 2012 A bonds.
The Rating Outlook on all of the 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 series 2012A bonds being issued and the UWFA, series B4 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
STRONG FINANCIAL PERFORMANCE: The district's financial performance has been strong with strong debt service coverage (DSC) over 3.0x and robust liquidity.
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.
CHANGING REVENUE MIX: Although not pledged to revenue bondholders, property tax and motor vehicle tax receipts currently provide the majority of district revenues (71% in fiscal 2011) and are used to support O&M expenses with the remaining amounts available for any purpose, including revenue bond repayment (CUWCD GO bonds rated 'AAA' with a Stable Outlook by Fitch). The mix will change as water revenues are projected to grow to 50% of revenues by 2015.
LARGE CAPITAL INVESTMENT UNDERWAY: The district's Central Water Project (CWP) requires additional debt that will be supported with revenues from signed take-or-pay water supply agreements. Water deliveries begin primarily in 2014, which will coincide with a rapid escalation in debt service related to the project over the next three years.
WHAT COULD TRIGGER A RATING ACTION
SIGNIFICANT FINANCIAL MARGIN DECLINE: Maintenance of the district's strong financial position is key to supporting the 'AA+' rating. The financial margins could experience pressure as the district implements its large, primarily debt funded capital plan and its revenue mix evolves to a higher dependence on water revenues.
CREDIT PROFILE
The district manages water resources to meet the water requirements of approximately 1.7 million (approximately 62% of Utah's residents). In addition to operating three water treatment plants, the district manages two water resource development projects: the Bonneville Unit of the Central Utah Project (the CUP) and the Central Water Project (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 MAJORITY OF DISTRICT REVENUES
Tax revenues provided 71% of revenues in fiscal 2011 with water sales providing only 23% of district revenues. Tax revenues are used to pay operation and maintenance costs of the district's water system, federal contract amounts and debt service on the district's general obligation 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 .0004 per dollar of taxable value to begin to generate additional revenues for anticipated debt and capital spending. As taxable assessed value declined slightly since 2009, the district increased its levy above the cap in order to hold revenues stable, as permitted by Utah's truth in taxation law. The district levied a rate of .000436 in fiscal 2011. Flexibility is provided by amended state legislation passed in 2007 that allows the district to levy an additional $0.0001 per dollar of taxable assessed valuation if the additional levy is necessary to provide adequate funds to pay maturing bonds or other debts of the district, which includes revenue bonds. In 2011, this $0.0001 levy would have generated approximately $11.3 million, although the district has never levied the additional tax levy.
As the district ramps up sales from the CWP, water sales will become a more prominent revenue. Water sales are expected to provide around 50% of revenues 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 Central Water Project are approximately $215 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 acre feet 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 are expected to begin in July 2014 to the Jordan Valley Water Conservancy District for its 11,680 af share. The fixed assessments due from the purchasers based on their contracted amounts and will not change with actual usage and are designed to be sufficient to pay the debt costs being incurred to build the project, which will increase CUWCD debt service considerably in the next five years.
STRONG FINANCIAL PERFORMANCE AND RESERVE LEVELS
Fitch's projected debt service coverage of senior lien revenue bonds (after payment of GO debt service) is estimated at over 2.0x, with the exception of fiscal 2014. The 2014 year is a pressure point since water sales from the CWP will still be ramping up but total debt service more than doubles from $11 million in fiscal 2013 to $25 million in fiscal 2014. These debt service numbers include full debt service due on Build America bonds and the federal subsidy is considered by Fitch as a revenue source (and is not netted against debt service). All-in debt service coverage, including coverage of Jordanelle project debt service from water revenues, should it be necessary, also remains in the same range of over 2.0x with the exception of fiscal 2014. The low financial margins anticipated in fiscal 2014 should still remain above 1.5x.
The district has very strong liquidity levels as revenues have been increased in anticipation of capital spending and increasing debt costs. Liquidity of $33.7 million of unrestricted cash and investments at the end of fiscal 2011, equaled to 1,050 days operating cash, although liquidity is more modest in relation to the district's $30 million debt service obligation in fiscal 2011 for both GO bonds and revenue bonds.
To mitigate volatility of coverage levels during its capital plan, the district's revenue bond indenture requires a debt service coverage maintenance fund (CMF) which is effectively a debt service coverage stabilization fund. The CMF will utilize fund transfers to ensure coverage is kept at 1.50x. The fund has $2 million at the end of fiscal 2011 but is required to reach $20 million by fiscal 2016, for use through fiscal 2021, coinciding with the district's completion of the CWP.
JORDANELLE HYDROELECTRIC PROJECT
Electric revenues from the Jordanelle Hydroelectric project are pledged to bondholders. The 12 MW hydroelectric project began commercial operations in July 2008. Full output of the facility is sold under a 'take and pay' contract to Heber Power & Light (electric bonds rated 'AA-' by Fitch), 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 Utah Water Finance Agency, series B2 bonds. Since commercial operation, hydrological flow at the project has exceeded average conditions. The resulting excess cash flow has been used to fully fund the required Jordanelle reserve fund at $3 million (separate from the debt service reserve fund) and to cash defease $3.34 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 debt service coverage 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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'Water and Sewer Revenue Bond Rating Guidelines', dated July 28, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
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