TEXT-Fitch affirms West Bountiful, Utah water revs at 'A+'
Jan 25 - Fitch Ratings takes the following rating action on West Bountiful, Utah (the city) bonds: --Approximately $4.4 million water system revenue bonds, series 2009 affirmed at 'A+'. The Rating Outlook is Stable. SECURITY The bonds are secured by net revenues of the city's culinary water system (the system). Revenues include culinary water user fees, impact fees, and connection fees. SENSITIVITY/RATING DRIVERS REBOUND OF LIQUIDITY: Liquidity and coverage levels have improved as a result of steep rate hikes. With the city's planned use of cash to fund capital improvements, Fitch expects liquidity to decline but remain adequate. ELEVATED RATES: Rates are at Fitch's threshold affordability levels after two years of significant rate hikes and well above neighboring communities which could reduce future flexibility. HIGH BUT DECLINING DEBT: The debt burden is above average but there are no plans for future borrowing. ADEQUATE SUPPLY: Water supply is adequate through build out and the city is diversifying its supply by constructing a new well. AVERAGE LEGAL PROVISIONS: Legal safeguards for bondholders are standard. WHAT COULD TRIGGER A RATING ACTION DETRIORATION OF LIQUIDITY POSITION: Management's inability to balance cash funded capital needs while maintaining adequate liquidity would likely cause downward pressure on the rating. CREDIT PROFILE AMPLE SUPPLY THROUGH BUILDOUT The system serves just over 1,600 connections, with the majority of those being residential accounts. The city has sufficient water rights to both imported and local well water to meet its projected culinary water needs through build-out. RATE HIKES BOOST FINANCES The city council increased water rates by 36% in 2009, after many years without rate increases, to support rising annual debt service (ADS) costs associated with the 2009 bonds. With the need to replace 35-60 year old water lines and maintain debt service coverage when the 2009 bonds started to mature, the city enacted a second rate increase in 2010, raising rates by 110%. FUTURE RATE FLEXIBILITY STRAINED Fitch is concerned that with the recent rate increases, future rate flexibility is sharply diminished given user charges are now well above neighboring communities and above Fitch's affordability benchmark of 1% of median household income for residential customers. However, capital plans are well defined and supported by the recent rate hike alleviating the need for any additional borrowing. Consequently, Fitch does not believe that the diminished rate flexibility will adversely impact the system's financial or capital funding capacity. STRONG COVERAGE In 2012 the city took action to discontinue loans to the golf fund which has also supported a rebounded cash position. The city formalized repayment of over $1 million in loans to the golf fund, of which $190,000 will be to the water fund directly. The loans to the various funds will be repaid beginning in 2015 after golf fund revenue bonds are repaid. The system posted over $967,000 in unrestricted assets for fiscal 2012, equal to 722 days cash on hand (DCOH). Debt service coverage rebounded along with liquidity and registers at a strong 3.1x for fiscal 2012, after falling to a low in fiscal 2010 of 1.3x. ADEQUATE LIQUIDITY KEY TO CREDIT STABILITY The 2012 - 2017 capital improvement program (CIP) totals approximately $5 million and will be entirely funded from user charges. The system's liquidity position has been volatile over the past five years, reaching highs of over 1700 DCOH in fiscal 2007, to zero in fiscal 2010. Fitch believes the system's future cash position will decline given plans to cash fund the CIP. Maintenance of the current rating will depend on management's ability to balance funding of future capital needs while maintaining adequate liquidity levels. DECLINING DEBT BURDEN; STANDARD LEGALS The system's elevated debt levels should improve given the lack of future borrowing plans. Currently, outstanding debt per customer and on a per capita basis is moderately high at $2,651 and $781, respectively. Favorably, debt amortization is faster than median levels of similarly rated credits, with 40% of principal retired in 10 year and 100% in 20 years. Legal protections for bondholders are standard and include a 1.25x ADS coverage rate covenant and additional bonds test. The debt service reserve fund is supported by a surety policy. SMALL, STABLE SERVICE AREA The city is a residential community of 5,400 residents located eight miles north of Salt Lake City. While primarily a bedroom community with few major employers of its own, the city has good access to both the Salt Lake City and Davis County employment markets. Wealth levels are above average at 123% and 134% higher than the state and nation, respectively. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', dated June 12, 2012; --'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 3, 2012; --'2013 Water and Sewer Medians', dated Dec. 5, 2012; --'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. Water and Sewer Revenue Bond Rating Criteria 2013 Water and Sewer Medians 2013 Outlook: Water and Sewer Sector