Fitch Affirms Mountain Regional Water Special Service District, UT's Water Revs; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the 'A+' rating on Mountain Regional Water Special Service District, UT's (the district) following obligations:

--$4.6 million water revenue refunding bonds series 2009B;

--$27.3 million water revenue refunding bonds series 2012;

--$8.1 million water revenue bonds series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the district's water system, including impact fees and special assessments.

KEY RATING DRIVERS

MODEST FINANCIAL PROFILE: Historic and projected all-in debt service coverage (DSC) typically is lower than the categorical median. Additionally, all-in debt as a percentage of gross revenues is high at 37%, while the median is 25%.

HIGHLY LEVERAGED SYSTEM: Although declining over the five-year forecast period, debt levels are projected to remain high. Debt per capita and debt to equity are both higher than categorical medians.

LIMITED SHORT-TERM CAPITAL NEEDS: The current five-year capital improvement program (CIP) totals only $4.3 million, and will be mostly cash funded. Projects related to new development will be paid for by developers.

REVENUE STABILITY IN RATE STRUCTURE: A large portion of an average resident's monthly bill is recovered through a fixed fee, providing a measure of revenue stability.

GROWING CUSTOMER BASE: The district serves a growing area through both retail and wholesale accounts. New retail customers have grown by an average of over 3% each of the last three years.

RATING SENSITIVITIES

ABILITY TO ACHIEVE FORECAST: The rating is sensitive to Mountain Regional Water Special Service District's ability to achieve forecasted DSC and operating revenues. Failure to do so would likely result in downward rating pressure.

CREDIT PROFILE

The district is a culinary and irrigation water supplier in western Summit County, an area generally known as the Snyderville Basin. Covering approximately 40 square miles, it serves nearly 7,000 residents and The Canyons ski resort. A regionalization agreement between the district, Summit Water, Park City, and Weber Basin enables the district to sell surplus water to other retail water service providers in the area. As a result of two large wholesale contracts with Summit Water and Park City, the district produces more water for its wholesale customers, than for its retail customers.

SUFFICIENT COVERAGE AND LIQUIDITY

The district achieved all-in DSC of 1.4x and 1.7x in fiscals 2014 and 2015, exceeding prior forecast expectations. Management's forecast points to all-in coverage of 1.5x in 2016, dropping to 1.3x 2017, and returning to 1.4x in 2018 and beyond. To achieve targeted DSC of 1.4x, the district anticipates implementing rate increases in fiscals 2019 through 2021, in addition to cash defeasing debt due in fiscals 2019 through 2021. Successful defeasance of the planned debt will be critical to the district achieving targeted coverage levels, as will continued growth in the customer base. Fitch believes the forecasted growth assumptions used by management are reasonable. Additionally, the cash to be used for defeasing debt in 2019 through 2021 will be provided by water sales under the regionalization agreement. Based on audited 2015 results, and the existing contract with Summit Water, Fitch expects there to be sufficient cash available to execute the planned defeasances.

Liquidity has steadily improved from 181 days cash on hand (DCOH) in fiscal 2011 to 339 DCOH in fiscal 2015. The district plans on cash funding about 75% of its CIP so liquidity may decline somewhat, but should still remain sufficient to provide financial flexibility.

HIGH DEBT LEVELS, MANAGEABLE CAPITAL NEEDS

With almost $49 million in debt outstanding at fiscal 2015, debt levels are high with debt to equity at 13.2x versus the categorical median of 4.5x. Debt per capita also is elevated and higher than similarly-rated systems. For 2015, debt per capita was $7,154, while the categorical median is only $675. Positively, the district's debt amortizes more quickly than similarly-rated systems, with 50% amortized within ten years, and all debt fully amortized within 20 years.

Future capital needs are manageable, with the majority of water infrastructure needed by the district to meet projected demand through build out completed. The current five-year CIP totals $4.3 million. The district plans to cash fund the CIP with cash and impact fee collections. While debt per capita is expected to decline over the five-year horizon, it will likely remain above the categorical median.

As outlined in the regionalization agreement, a second water importation project will be constructed by Weber Basin in the area, projected within the next seven to fifteen years. Management anticipates its prorated share of the project costs will be $4 to $6 million. The district will reimburse Weber Basin through increased lease fees over a 20 year period, but accounting standards will require the district to reflect the cost as a note payable, which would be on parity with existing debt. Given the anticipated timing of the project, the district's relatively rapid amortization, and projected steady growth, Fitch does not expect debt ratios would return to their historically high levels.

RATE STRUCTURE PROVIDES REVENUE STABILITY

The district has several types of retail customers, including active customers and standby customers. Standby customers are considered to be platted properties for which water infrastructure is installed and in a ready-to-serve status. The standby customers' monthly fee of $38.50 is entirely fixed and is paid by developers until the property is purchased and the new owner takes over payment. For active customers, the average residential monthly bill is comprised of a fixed fee that equates to 75% of the monthly bill. The balance is recouped through tiered volumetric charges. Such a rate structure provides a good deal of revenue stability for the district.

In 2015, rates slightly exceeded Fitch's affordability measure and equated to 1.1% of median household income, based on actual average residential usage of 8,454 gallons per month. High rates are partially attributable to the challenges of distributing water in a mountainous topography and the small customer base. However, this concern is somewhat mitigated by comparable rates in surrounding areas and limited additional capital needs.

GROWING CUSTOMER BASE, AFFLUENT SERVICE AREA

The district's customer base is small but growing, with nearly 5,200 accounts in fiscal 2015. Since 2013 the number of active customers has increased by an average of 3.3% each year. The district's top ten customers represented nearly 25% of revenues in fiscal 2015, which is moderate for a system that produces both retail and wholesale water. Wholesale revenue also is expected to increase with additional contracted sales to Summit Water increasing in 2018, and possibly again in 2020.

Summit County wealth levels are high with median household incomes at 140% of state and 160% of U.S. averages. Unemployment is extremely low at 2.8% (September 2016) compared to the national average of 4.7% (October 2016).

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/site/re/869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014975

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014975

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst
Audra C. Dickinson
Associate Director
+1-512-813-5701
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Audra C. Dickinson
Associate Director
+1-512-813-5701
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com