Fitch Rates Metropolitan Water District of Salt Lake & Sandy, Utah Revs 'AA'.

AUSTIN, Texas -- Fitch Ratings assigns an 'AA' underlying rating to Metropolitan Water District of Salt Lake and Sandy, Utah (the district) est. $81.8 million water revenue bonds, series 2005. In addition, Fitch has affirmed the underlying 'AA' rating on the district's $146.9 million outstanding revenue bonds. The Rating Outlook is Stable.

The bonds are scheduled to be offered in two series:

-- $31.5 million series 2005A fixed rate serial bonds;

-- Approximately $50.3 million series A11 bonds.

Both series are scheduled to be sold on a negotiated basis to George K. Baum & Co. and are expected to be insured by AMBAC, whose insurer financial strength is rated 'AAA' by Fitch. The series 2005A bonds are expected to price the week of Jan. 10, 2005 and the series A11 bonds are expected to price the week of Jan. 24. The series A11 bonds likely will be sold as a conduit offering issued on behalf of the district by the Utah Water Finance Agency. The district plans to enter into an interest rate swap for the series A11 bonds. Fitch is expected to assign both long and short-term ratings on the series A11 bonds prior to pricing. The ratings on the series A11 bonds will be based on the anticipated bond insurance policies and a liquidity facility to be provided by JP Morgan Chase Bank, NA.

The 'AA' rating reflects the district's role as a major supplier of wholesale treated water to Salt Lake City and Sandy City. In addition to the strength and diversity of the local economy, additional positive credit considerations include a historically sound financial profile, prudent management policies and procedures, and a new, dedicated revenue source to offset escalating debt service costs. Credit concerns include declining debt service coverage and liquidity levels, reflections of both an ongoing drought and increasing debt levels associated with the district's substantial capital plan. The district is actively pursuing additional water sources, as drought and population growth pressures have the potential to stress long-term supplies.

The district generates a good mix of revenues, including water sales, property taxes and a new capital assessment imposed to pay for additional treated water capacity. Fitch views positively the district's financial flexibility. The district's wholesale water rates are considered moderate, and the planned increases that will boost charges from $150 per acre-foot currently to $200 by fiscal 2009 are not expected to raise affordability concerns. The district also maintains flexibility in its tax levy, which is well below the maximum of $0.05 per $100 of taxable value.

The district's finances have come under some pressure over the past several fiscal years as declining water sales and increasing debt payments have combined to squeeze margins and reduce reserve levels. According to the district, conservation efforts throughout the service area in response to the drought have resulted in reduced water sales in three of the past four fiscal years despite growth in population and customer count. However, liquidity remains very healthy--cash and investments at fiscal 2004 year-end totaled $18.5 million, or 525 days of expenditures.

The district's debt burden is increasing, due to the funding of master plan projects to increase treatment capacity and improve conveyance facilities. The current offerings follow $90 million in bonds sold in 2004, and an additional offering is scheduled for 2005 or 2006. Capital spending associated with the treatment and conveyance projects is expected to total between $200 million--$220 million by fiscal 2007. Annual debt payments associated with these issues are expected to lower debt service coverage to roughly 1.30 times (x) by fiscal 2009; annual coverage had been as high as 3.6x as recently as fiscal 1999.

Bonds are secured on a senior-lien basis by a pledge of net revenues from district operations. The district covenants under a master resolution to set rates sufficient to produce annual net revenues of at least 1.15x annual debt service; however, district policy calls for a minimum of 1.25x coverage. Fitch considers this practice, as well as other reporting and reserve policies maintained by the district, as credit strengths that mitigate to a degree the concern regarding increasing debt levels.

The district provides a substantial portion of Salt Lake City and Sandy City's wholesale drinking water via facilities and partnership infrastructure spread across Wasatch, Utah and Salt Lake counties. Its two primary customers serve nearly 450,000 residents, or one-fifth of the state's population. The Salt Lake metropolitan area is the state's trade and commerce center; current local unemployment rates, while higher than historical levels, are down from recent recessionary peaks and are below the national average.

Created in 1935, the district obtains most of its water from its ownership interest in the Provo River Water Users' Association--equal to 61,700 acre-feet per year. Other supplies include up to 7,900 acre-feet from the Dell Creek Project and a recently approved annual allotment of 20,000 acre-feet from the Bonneville Unit of the Central Utah Project. Additional water supplies are being sought. While current and proposed supplies appear adequate through 2025, sustained droughts likely would impair the district's ability to meet its customers' needs.