Fitch Affirms Washington County Water Conservancy Dist's, UT Water Revs at 'AA'; Outlook Stable

Fitch Ratings has affirmed the following Washington County Water Conservancy District, UT (the district) obligation's at 'AA':

--$64.9 million water revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured and payable from a first lien on and pledge of the net revenues of the combined water and hydroelectric system.

KEY RATING DRIVERS

DIVERSE REVENUES AND SOLID CONTRACT PROVISIONS: The revenue streams supporting water system operations are diverse, including service charges and property taxes. The contract includes certain step-up provisions that protect against non-payment by one of the district's eight wholesale customers.

AMPLE WATER SUPPLY: Approximately 55% of district water rights are allocated for sale under take or pay contracts and a regional water sales agreement. The remaining rights will support future growth. Minimum charges from the existing sales are sufficient to support operations and debt costs.

STRONG WHOLESALE OPERATIONS AND PLANNING: The rating reflects the predominantly wholesale water system's strong management, stable operations, and multi-year financial and facilities planning.

RELIANCE UPON VOLATILE IMPACT FEES: The district's solid all-in debt service coverage is reliant upon impact fees, which have been relatively volatile. However, this is mitigated by the district's solid debt service coverage less the fees and large cash balances.

AFFORDABLE DEBT; MANAGEABLE CAPITAL PLAN: Debt levels are affordable and capital needs are manageable as the district has adequate water sources, surplus system capacity, predominantly new infrastructure, and faces no regulatory issues.

STABILIZING SERVICE AREA GROWTH: The service area's recent history of rapid population, employment, and assessed valuation growth has slowed somewhat giving the district additional flexibility regarding long-term capital projects.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district is the primary provider of water in Washington County (general obligation bonds rated 'AA' with a Stable Outlook by Fitch). The county is located in the southwest corner of the state bordering Nevada and Arizona with a population of about 150,000. The county is home to a large number of retirees and second homes and its economy is dominated by retail, tourism and distribution sectors. The county's location along the I-15 freeway makes it an attractive location for distribution facilities.

STABLE WHOLESALE AGREEMENTS AND DIVERSE REVENUES

The majority of district water system revenues are generated by nine take-or-pay wholesale water sales contracts and a regional water sales agreement with eight of its wholesale water customers. The regional water sales agreement provides revenues from a water availability charge (a one-time impact fee imposed on new developments), a monthly water development surcharge applied to all existing equivalent residential units, and a wholesale delivery charge based on the number of units of water delivered to each municipality. In the event that a municipality fails to make a delivery charge payment, the other municipalities would be required to make up the difference (up to 25% over their additional contracted amount).

Further revenue diversity is provided by the district's covenant to levy and collect as much of the ad valorem tax of 0.001 per $1.00 of all taxable assessed valuation as required to pay operation and maintenance (O&M) costs. While the receipts from such taxes are not pledged to the revenue bonds, they are available for revenue bond debt service. Tax collections in fiscal 2012 totaled $9.9 million, as compared to system operating and general fund expenditures of $7.1 million (net of depreciation).

The district owns and operates the Quail Creek Hydroelectric Plant and the Pah Tempe Hydroelectric Plant. All electricity generated by the plants is sold to the Dixie Escalante Rural Electric Association and Hurricane City under a contract expiring in 2019. Power sales generated about 9.5% of total proprietary fund revenues in fiscal 2012. The district does not have any hydroelectric debt outstanding.

STRONG SUPPLY AND STABILIZING SERVICE AREA

The district provides water on a wholesale basis to the county's main municipalities, including St. George (water revenue bonds rated 'A+' with a Stable Outlook), Washington, Ivins, Hurricane, La Verkin, Toquerville, Leeds and Santa Clara, as well as retail services to small communities and unincorporated areas. The county's previously rapid growth has slowed to a more manageable pace in recent years.

Over 40% of the district's 42,110 af per year of water sources is surplus and will be used to serve future growth. The district's peak summer demand is 37 million gallons per day (mgd) and winter demand is 7 mgd compared with current capacity of 48 mgd. Furthermore, the district plans to expand capacity to 60 mgd in about a year. The district is operating a groundwater recharge program that currently provides 100,000 af of water and will ultimately provide access to up to 300,000 af.

SOLID COVERAGE, LIQUIDITY

Financial metrics have been consistently strong, with all-in debt service coverage over 2.0x each of the last seven years. Fiscal 2012 year-end coverage was 3.0x and estimated fiscal 2013 coverage is similar. However, all-in coverage less impact fees averaged 1.8x over the five years ending fiscal 2012 and are estimated at 1.7x for fiscal 2013. District projections are based on reasonable assumptions, and indicate that coverage levels will dip to a low of 2.3x, or 1.3x less impact fees, over the four-year forecast period due to increased debt service payments.

The district utilizes a pooled cash approach, and as such total unrestricted cash, which includes some balances held in governmental funds (rate stabilization fund, capital facilities fund, O&M fund, and renewal and replacement fund reserves), increased from $45.3 million in fiscal 2011 to $52.6 million in 2012 and $59.3 million in fiscal 2013 (unaudited). The district's practice is to build up cash reserves in the capital projects fund as it plans to fund future capital projects primarily from impact fees and water development surcharges.

MANAGEABLE CAPITAL PLAN

The district's near-term capital needs are manageable due to its use of impact fees to cover infrastructure costs and its surplus capacity. Although revenues from these fees declined during the recession, they more than tripled between fiscals 2009 and 2013. The five year capital plan totals $180 million, including a $28 million Quail Creek water treatment plant expansion, $22 million Sand Hollow well development and pipeline, and $11.9 million Ash Creek pipeline project expected to generate an additional 6,000 af of water per year. However, some of the project start dates are flexible, including the most costly project - the $91 million Warner Valley Reservoir. As currently planned, the project begins in 2017 with possible borrowing as early as 2016. The district's 30-year capital plan, last updated in 2006, contains about $853 million in projects that are contingent upon population growth.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--'2014 Water and Sewer Medians' (Dec. 12, 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818071

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