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Fitch Rates Met Water Dist. of Salt Lake and Sandy (Utah) Revs 'AA'.

SAN FRANCISCO -- Fitch assigns its 'AA' underlying rating to Metropolitan Water District of Salt Lake and Sandy, Utah (the district) $34.6 million water revenue bonds, series A-16. In addition, Fitch affirms the underlying 'AA' rating on the district's $228.3 million outstanding revenue bonds. The Rating Outlook is Stable.

The bonds are scheduled to be offered in one transaction, with $15.3 million being offered in variable rate mode and swapped to fixed; and $19.3 million in true variable rate mode. The bonds are scheduled to be sold on or about August 14 on a negotiated basis with George K. Baum & Co. and are expected to be insured by AMBAC. Fitch rates AMBAC's claims paying ability 'AAA'. The bonds will be sold as a conduit offering issued on behalf of the district by the Utah Water Finance Agency. Fitch is expected to assign both an enhanced long term and a short-term rating on the series A16 bonds prior to pricing. The ratings 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, reflecting both the ongoing drought and the 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 stressed financial margins and reduced 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 2005 year-end totaled $14.8 million, or 628 days of expenditures (excluding depreciation).

The district's debt burden has increased dramatically from 10% of expenditures in fiscal 2003 to 48% in fiscal 2005, due to the funding of master plan projects intended to increase treatment capacity and improve conveyance facilities. As the current offering completes the district's debt-financed portion of the master plan, debt service payments should become more level. Annual debt payments associated with this issue are expected to lower debt service coverage to a low of 1.25 times (x) by fiscal 2009, but rise to 1.4x by fiscal 2011; annual coverage had been as high as 3.6x as recently as fiscal 1999. The district has actively worked to reduce its cost of borrowing through the use of variable rate debt (19%) and synthetic fixed-rate debt (39%). The most recent swap executed on $15.3 million of the series A-16 bonds is the district's first LIBOR-based swap. Capital spending associated with the treatment and conveyance projects is expected to total $250 million by fiscal 2007.

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. In addition, the district has acquired 8,600 acre-feet of water from the Utah Lake System water project and 3,100 acre-feet of water rights from the Utah Water Company's water rights in the Ontario drain tunnel. While current and proposed supplies appear adequate through 2025, sustained droughts likely would impair the district's ability to meet its customers' needs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Aug 9, 2006
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