Fitch Affirms Eagle Mountain City, UT's Water and Sewer Revs; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the 'AA-' rating on the following Eagle Mountain City, UT (the city) obligations:

--$4.5 million water and sewer revenue and refunding bonds series 2007;

--$9.7 million water and sewer revenue refunding bonds series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on net revenues of the city's water and sewer systems (the system).

KEY RATING DRIVERS

HEALTHY FINANCIAL AND DEBT PROFILES: The system benefits from strong all-in debt service coverage (DSC), ending fiscal 2015 at 2.5x. Debt per customer is slightly better than the categorical median, and is projected to continue improving.

RELIANCE ON CONNECTION FEES: The system's strong coverage levels are boosted by the inclusion of connection fees. However, forecasted revenues from this source appear reasonable, and DSC remains satisfactory from service charges alone.

STRONG, GROWING SERVICE AREA: The district's customer base has grown by nearly 20% since 2011, and the city is projected to continue growing very rapidly. The area's unemployment rate and median household income (MHI) compare favorably with the state and national averages.

AMENDED WHOLESALE CONTRACT: The city is contracted with a regional wholesaler to take delivery of new water supplies. The contract was recently revised to push the delivery date out to 2021 when additional supply is more likely to be warranted due to growth.

AMPLE RATE FLEXIBILITY: User rates are affordable relative to the city's above average income levels, providing the system with good financial flexibility to increase revenues.

MANAGEABLE SHORT-TERM CAPITAL NEEDS: The system's five-year capital improvement plan (CIP) totals only $11.6 million and will be funded with a combination of impact fee collections and cash. No debt issuances are planned for at least the next 10 years.

RATING SENSITIVITIES

SUCCESSFUL MANAGEMENT OF GROWTH: Eagle Mountain City's water and sewer system's rating is sensitive to its ability to effectively manage the demands of a rapidly growing service area while simultaneously maintaining solid financial and debt profiles.

CREDIT PROFILE

The city is located 40 miles southwest of Salt Lake City (general obligation bonds rated 'AAA' by Fitch) and 30 miles northwest of Provo, serving as a bedroom community. Population growth in the city has been rapid, expanding from a few hundred residents in the mid 1990's to the current estimated population of over 30,000. There is a significant amount of ongoing new construction fueled by the availability of vacant land and its proximity to large and diverse employment markets. The system provides essential water and wastewater service to a predominantly residential customer base of over 13,000 combined customers. As the city grows, management expects expanded commercial and industrial activity, but the system currently does not serve any industrial users.

SOLID DEBT PROFILE, MOSTLY STABLE FINANCES

Current debt ratios are mostly commensurate with similarly rated systems, and expected to improve. Debt per customer in fiscal 2015 was $1,944, which is in line with the rating category. With no new debt issuances planned and anticipated strong growth, projected debt per customer is expected to decrease over the five year horizon. The system also benefits from above average amortization, and all debt is repaid within 20 years. Yet debt to equity remains elevated at 6.2x, while the 'AA' categorical median is 3.4x.

The system's all-in DSC came in at 2.2x in 2014, and improved to 2.5x in fiscal 2015, stronger than comparably rated systems. The coverage is bolstered by strong connection fee revenues, specifically in fiscal 2015 when connection fee collections increased by over 80% after the impact fee schedule was restructured. DSC remains satisfactory excluding connection fees and is expected to remain at 1.9x or higher. Although liquidity improved to 303 days cash on hand (DCOH) in fiscal 2015, historically it has shown a level of volatility. Moreover, it may decrease in upcoming years due to the pay-go funding planned for a portion of the system's CIP.

RATE FLEXIBILITY, STRUCTURE MITIGATE DEPENDENCE ON IMPACT FEES

Growth in the number of connections and the collection of related impact fees have allowed user charges to remain affordable while providing the system with strong DSC and resources to upgrade and expand the system. The system collected about $1 million in fiscal 2014 in impact fees, which increased to over $1.8 in fiscal 2015 after adjusting the fee structure. Management's financial forecast appears reasonable and projects $1.1 million annually through the five year forecast period.

As the system benefits from ample rate flexibility, user rates could be increased to offset lower than projected impact fees should development decelerate. Based on Fitch's usage metrics of 7,500 and 6,000 gallons of water and wastewater, respectively, the combined monthly bill is reasonable at slightly over $67. This equates to a low 1.2% of the city's MHI, well under Fitch's affordability measure of 2%. Actual average residential monthly water usage is higher but still results in a combined bill equal to only 1.3% of MHI. Additionally, the residential user's rate structure provides a measure of revenue stability by collecting a high proportion of the monthly bill through a fixed fee. Based on actual average usage, more than 75% of the combined monthly bill is recovered through fixed fees. The balance is recouped through tiered volumetric charges.

RAPIDLY GROWING CUSTOMER BASE, AFFLUENT SERVICE AREA

The city benefits from its proximity to the employment centers in Salt Lake City and Provo and its population increased by 55% from 2006 to 2015. The population growth resulted in the system's combined customer count increasing by a rapid average of 4.5% annually since 2012. MHI for the city compares favorably to the state and national averages, equating to 127% of the national average, and the local unemployment rate is lower than state and national averages. Management reports that the collection rate is over 98% and it enforces a strict shut off policy on delinquent accounts.

AMPLE SUPPLY, FAVORABLE CONTRACT AMENDMENT

The city's water is supplied by four local groundwater wells with a total capacity of 12.1 million gallons per day (mgd). Average demand has varied year to year based on weather conditions, but ranged from 4 to 6 mgd over the last five years. While the city expects this supply to meet demand for the foreseeable future, it is contracted to begin delivery of imported water from the Central Utah Project in fiscal 2021 under a contract with the Central Utah Water Conservancy District (water revenue bonds rated 'AA+' by Fitch).

The originally contracted take-down schedule called for the city to take delivery of 15,000 acre feet (af) annually by fiscal 2021. Management indicated no water was delivered in fiscals 2015 or 2016 as initially contracted. The contract was amended in early 2016 to delay any future deliveries until fiscal 2021 when delivery will start at 220 af, and increase by 470 af each year until the full delivery amount is reached. The recent amendment also reduced the required total take-down amount to 11,500 af. The city also has the option to sell its water rights to other entities.

While Fitch considers the recent amendment favorable for the city, the contract still exposes the system to the risk that less than projected growth may not cover the costs of annual take down payments. The current rating incorporates Fitch's expectation that the city will achieve sufficient growth to offset the costs of future take-downs, or management will otherwise initiate an effective mitigating strategy.

MANAGEABLE SHORT TERM CAPITAL NEEDS

The system's current CIP through fiscal 2021 totals only $11.6 million. Management anticipates funding 59% through impact fee collections, and the remainder will be cash funded. No debt issuances are anticipated for at least 10 years. While the short term capital needs are modest, expansion of the city's wastewater treatment plant may be needed within 10 to 15 years. The timing of the expansion will be dependent on growth in the south and west service areas as those are the two areas served by the plant. Management reports that residential growth in the past few years was heavily concentrated in the north service area, but this area is now becoming more built out so development is expected to shift to the south and west.

Most projects included in the system's CIP are growth driven. None are required to meet any regulatory stipulations. As such, it gives the system flexibility to defer projects should the area's growth rate slow from current levels.

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. 30 Nov 2016)

https://www.fitchratings.com/site/re/890402

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015666

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015666

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Audra C. Dickinson, +1-512-813-5701
Associate Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director

Contacts

Fitch Ratings
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Audra C. Dickinson, +1-512-813-5701
Associate Director
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Andrew Ward, +1-415-732-5617
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director