Fitch Rates Mountain Regional WSSD, UT Water Revs 'A'; Upgrades Outstanding.

SAN FRANCISCO -- Fitch Ratings assigns an 'A' rating to Mountain Regional Water Special Service District, Utah's (the district) $10.5 million water revenue refunding bonds series 2009B. Concurrently, Fitch upgrades to 'A' from 'BBB' the rating on the district's $32.57 million of outstanding water revenue and refunding bonds, series 2003. The bonds are scheduled to price the week of August 10, 2009 via negotiated sale. The Rating Outlook on the bonds is Stable.

The upgrade to 'A' from 'BBB' reflects a significantly improved financial position in recent years, specifically in the area of liquidity. While historic reserves were very narrow, the district has managed to boost fund balances even while successfully taking over and integrating a number of financially and operationally challenged water companies over the past six years.

The 'A' rating reflects the district's adequate financial position, manageable capital needs and affluent service base. Other credit factors include very high debt levels and rates that are well above average. Financial performance has improved in recent years and is expected to remain relatively stable given limited capital needs. The district maintains adequate water supply to accommodate ultimate build out.

The district's financial position has improved significantly as the district has incrementally added to reserves since fiscal 2002 when reserves were neglible. For fiscal 2002, the district ended the year with a low 15 days of unrestricted cash ($60,000). However, since that time positive cash flows have allowed the district to boost reserves to the extent that for fiscal 2008, the district's cash position equaled 391 days of operating expenses ($3.6 million), including operating cash reserves.

Annual debt service (ADS) coverage levels have been good ranging from 1.6 times (x) to 2.1x from fiscal 2004-07. However, coverage fell in fiscal 2008 to 1.3x due to reduced impact fees from the slowing economy. Projected ADS coverage, which now includes special assessments as revenues and incorporates the previous special improvement district assessment revenue bond debt service as water system revenue debt, is expected to be at least 1.3x through 2013. Credit challenges focus on maintaining the district's good operating cash reserve levels as new development slows and impact fee revenues are reduced.

Capital needs are very manageable with no major capital projects planned in the next few years. A new operations complex building will require an estimated $1-$1.5 million of financing, but is not expected to begin construction until the pace of new development returns to pre-recession levels. The district's 7,800 acre-feet of water rights provides adequate supply to accommodate growth through ultimate build out by 2025-2030.

Debt levels are high with per capita debt of over $7,300. Rates are also high for the region at $64 monthly for 8,000 gallons. These two metrics are high compared to other systems due to the cost of transporting water to a challenging geography, a small customer base and new infrastructure. However, this concern is somewhat mitigated by a fairly affluent customer base.

The district was created in April 2000 by the Summit County Commission to regionalize water service in the western portion of Summit County by consolidating several water companies, both public and private, that were failing both operationally and financially. The district now covers approximately 39 square miles within Summit County and serves a primarily residential customer base of approximately 6,000 residents. Summit County wealth levels are high with median household incomes at 156% of state and 166% of U.S. averages and per capita assessed value of over $280,000.

Legal provisions are adequate with a 1.25x rate covenant and 1.25x maximum ADS additional bonds test. There is also a fully funded debt service reserve. The bonds will refund all of the district's outstanding 2003 assessment revenue bonds which were secured only by special assessments and not previously rated, along with a portion of the outstanding series 2003 water revenue bonds. With this refunding issue, the bond indenture will be modified to include special assessments as part of the pledged revenues for debt repayment. The bonds are secured by net water system revenues, including impact fees and special assessments and are on parity with approximately $4.3 million of state loans.

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