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Eagle Mountain City Water and Sewer Revenues Upgraded to AA by Fitch Ratings

Outlook Stable

Post Date:11/20/2018 12:16 PM

 Fitch Ratings 3

Fitch Ratings, New York, 13 November 2018: Fitch Ratings has upgraded the following Eagle Mountain City, UT (the city) obligations to 'AA':

$13.8 million water and sewer revenue and refunding bonds, series 2007 and 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

STRONG, SUSTAINED FINANCIALS DRIVE UPGRADE: The upgrade reflects the system's
improved financial margins characterized by elevated debt service coverage (DSC) levels, a more
robust liquidity position and simultaneous decline in system leverage. This improvement is almost
entirely attributable to rapid, demonstrated service area growth that Fitch views as supportive of
long-term financial stability.

SUFFICIENT CAPACITY: The city has contracted with a regional wholesaler to take delivery of
new water supplies, supplementing the system's local groundwater resources. Wastewater needs
are also met, with ample capacity from the system's wholesale provider and city-owned treatment
plant.

MODERATE DEBT AND CAPITAL NEEDS: The system's five-year capital improvement plan
(CIP) appears manageable and primarily addresses growth needs that are mostly developer-funded.
Very minimal new debt planned in the near term should keep leverage levels manageable.

STRONG RATE FLEXIBILITY: Combined monthly charges fall well below Fitch's affordability
threshold of 2% of median household income (MHI), even when considering the city's above
average consumption levels.

NARROW ECONOMY; GROWING SERVICE AREA: The local economy is limited, but the
city has experienced substantial growth as a bedroom community of Salt Lake City and the Provo-
Orem metropolitan area. Economic indicators are positive, with wealth levels in excess of state and
national levels and poverty and unemployment rates below.

RATING SENSITIVITIES

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

CREDIT PROFILE
The city is located 40 miles southwest of Salt Lake City (Issuer Default Rating [IDR]: 'AAA'/
Outlook) and 30 miles northwest of Provo, serving as a bedroom community. The system provides
essential water and wastewater service to a predominantly residential customer base of over 15,000
combined customers.

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 32,000. 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. Most recently, Facebook broke ground on a 970,000 square-foot data center
within the city.

IMPROVED FINANCIALS DRIVE UPGRADE
Sustained customer growth and the receipt of associated impact fee revenues has resulted in a
trend of strong and improved financial margins. In fiscals 2016 and 2017 the system yielded strong
all-in Fitch-calculated DSC of 3.0x and 4.1x, respectively. These metrics are more modest when
excluding connection fees at 1.5x and 1.8x per year but are showing improvement and are within
range of Fitch's 'AA' category median of 2.0x. Surplus cash flows have also been bolstered by
the pre-sale of Central Utah Water Conservancy District (CUWCD; revenue bonds rated 'AA+')
water rights to developers. In fiscals 2016 and 2017, respectively, liquidity equated to 327 and 600
DCOH, well in excess of prior years. Preliminarily, management expects fiscal 2018 results to also
yield robust financial performance due to the receipt of one-time revenues.

The uptick in new customers and associated operating challenges has prompted the city to conduct
a rate study and update its financial forecast. Fitch expects that recent trends of rapid cash and
revenue growth should persist through the current rating cycle, supporting elevated financial results
relative to the rating.

PRUDENT GROWTH MANAGEMENT TO DATE
The city's water is supplied by four groundwater wells with a total capacity of 12.1 million
gallons per day (mgd). Average demand equated to nearly 5 mgd during fiscal 2017; however,
demand increases substantially during the summer months (peak of 11 mgd). To supplement
local resources, the city has contracted for the delivery of imported water from the CUWCD The
original contract had called for the delivery of 15,000 acre feet (af), although the contract has been
amended several times (most recently in April 2017) to better suit the city's supply needs. The
city's current allocation (fiscal 2017: 750 af) will continue to increase by 220-340 af, annually,
through fiscal 2021 at which point the full allocation of 1,800 af will be reached. Positively,
management has already pre-sold most of its available water shares, which mitigates some concern
that projected growth might not cover the costs of the annual contracted payments.

The system is divided into the north, south and west service areas, but those in the west are largely
on septic. Wastewater flows in the southern service area are treated at the city-owned wastewater
treatment plant with 1.2 mgd capacity, providing ample capacity given average flows of roughly
400,000 gallons. Wastewater flows in the northern service area are diverted to Timpangos Special
Services District (TSSD; sewer revenue bonds rated 'AA+') for treatment under a joint powers
agreement between the city and TSSD.

CAPITAL NEEDS, DEBT MANAGEABLE
The system's five-year, fiscal 2019-2023 totals $33.8 million, although $13.3 million of which
is dedicated for Facebook related projects (and will be 100% reimbursed by Facebook). The
remainder of the plan ($20.5 million) is driven by growth related needs. Positively, none of the
system's projects are regulatory-driven, which gives management the flexibility to defer projects
should the area's growth rate slow from current levels. The plan will be primarily funded from
internal resources, in addition to a small loan ($1.3 million) from the state.

While the system's short-term needs are more modest, an expansion of the city's wastewater
treatment plant may be needed within 10 to 15 years. However, the timing of the expansion is
unclear as it will depend entirely on how rapidly the south and west service areas continue to
develop.

The system's direct debt burden of $23.3 million is relatively manageable. At fiscal 2017 year end,
debt represented 36% of net plant, $1,501 per customer and 2.9x funds available for debt
service, all favorable relative to the 'AA' category medians of 46%, $2,000 and 5.5x, respectively.
Debt metrics should continue to decline over the forecast period as amortization is rapid (100% of
principal amortized in 20 years) and no new debt is currently planned.

STRONG RATE FLEXIBILITY
The system has not increased rates for some time, as customer growth and increased impact fee
revenue has continued to contribute to strong operating margins. However, the city maintains
ample flexibility should rates need to be increased in the future.

When measured as a percentage of MHI, user charges based on Fitch's standard assumption (7,500
gallons/month for water and 6,000 gallons/month for sewer) register at 1.1%, which is well below
Fitch's affordability threshold of 2%. Average residential water use is much higher at 19,750
gallons, although rates are still affordable (at that level1.3% of MHI). Rates are substantially fixed
(Fitch assumptions: 91%, actual usage: 79%), as sewer charges are entirely fixed and the water
volumetric charge ($0.8 for 0 - 65,000 gallons) comprises a small share relative to the base charge
of $20.

Contact:

Primary Analyst
Rachel Grossman
Analyst
+1-646-582-4967
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Andrew Ward
Director
+1-415-732-5617

Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738

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

A January 2018 district court ruling that dismissed claims regarding payment of Puerto Rico
Highways and Transportation Authority debt has raised questions about the scope of protections
provided by Chapter 9 of the U.S. bankruptcy code to bonds secured by pledged special
revenues. Fitch's rating criteria treat special revenue obligations as independent from the related
municipality's general credit quality. The outcome of the litigation could result in modifications
to Fitch's approach. For more information, see "What Investors Want to Know: The Impact of the
Puerto Rico Ruling on Special Revenue Debt" available at www.fitchratings.com.

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email:
sandro.scenga@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria
Rating Criteria for Public-Sector, Revenue-Supported Debt (pub. 26 Feb 2018)
https://www.fitchratings.com/site/re/10020113
U.S. Water and Sewer Rating Criteria (pub. 30 Nov 2017)
https://www.fitchratings.com/site/re/10010508

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CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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