Fitch Affirms Pleasant Grove, UT's Storm Water Revs at 'AA-'; Outlook Stable

Fitch Ratings affirms the following Pleasant Grove, Utah bond ratings:

--$12.2 million storm water revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a first lien on net storm water revenues.

KEY RATING DRIVERS

SOLID SERVICE AREA: The city's storm water enterprise provides an essential service to a stable, suburban customer base with above-average wealth and a strong regional economy.

STABLE FINANCIAL PERFORMANCE EXPECTED: All-in debt service coverage (DSC) is expected to average an adequate 1.5x over the next five years with assumed additional rate increases. Revenues are extremely stable and predictable. Liquidity is strong with 420 days unrestricted cash and investments on hand at the end of fiscal 2014.

HEALTHY DEBT PROFILE: Debt levels are moderate on per customer basis. The debt structure is low risk with level debt service on fixed-rate, fully amortizing bonds. Amortization is slightly slow, given that most bonds were recently issued.

LIMITED OPERATIONS: The utility is a passive storm water management system with very few employees and limited operating risks.

RATING SENSITIVITIES

STABLE RATING: The rating is sensitive to fundamental shifts key credit fundamentals, such as the debt burden and financial performance. The rating could decline if rate discipline and coverage slip, but the rating could rise if financial performance continues to be strong and debt declines as expected.

CREDIT PROFILE

The enterprise provides storm water management to the city of Pleasant Grove and its population of about 36,000 residents. The city is located between Utah Lake and Mt. Timpanogos in Utah County about 10 miles north of Provo and 36 miles south of Salt Lake City. The enterprise is essential to the mostly residential city because it manages significant runoff as snow melts on the mountain and flows through the city each spring.

STRONG SERVICE AREA

The service area is largely a bedroom community, but commercial development is picking up near a new interchange with Interstate 15, adding to the diversity of the payer mix over time. The customer base is diverse with about 90% of revenues coming from residential properties. The top 10 customers represent a manageable 11.8% of revenues and include a mix of stable governmental, religious and multi-family residential customers alongside potentially more vulnerable commercial accounts.

The city benefits from its location on Utah's economically dynamic Wasatch Front. Pleasant Grove's 2.8% unemployment rate in December 2014 was well below the national average of 5.4%, and median household income is above-average at 119% of the national median and 107% of the state level.

The City Council has independent rate-setting authority and has shown strong rate discipline. It raised storm water rates significantly to fund the 2011 and 2013 bond issues, raising the fee for a single family residence to $13.09 a month in fiscal 2015, up from $3 in 2010. Rate increases have slowed to a moderate pace, and rates do not appear to be overtly politicized.

HEALTHY FINANCIAL PERFORMANCE

All-in DSC was solid at 2x in 2014 and is expected to remain adequate for the rating category even as all-in DSC is projected to decline to about 1.5x total debt service over the five-year forecast. The declines in coverage levels reflect increased debt service costs related to full debt service for the rated 2013 bonds coming online. Management's financial forecast includes annual projected rate increases that have not yet been approved by the City Council. Actual coverage levels could be slightly lower if the council chooses to implement smaller rate hikes than the 6% proposed by staff in 2016. However, past support for rate recovery of costs has been strong.

The rating could come under downward pressure if coverage drops sharply, but Fitch believes the system's limited operating risks, ample reserves and fixed fee structure mean that the system can operate smoothly with fairly narrow coverage margins above its 1.25x rate covenant. The utility has a history of well outperforming forecasts, and if this continues, the rating could come under upward pressure. Revenues are quite stable due to the fixed nature of the storm water charge and collection procedures that require a cut off of water service if the bill is unpaid after 45 days.

The utility has improved its liquidity position significantly in recent years. The storm water system had $741,585 of unrestricted cash and investments on hand as of June 30, 2014, or 420 days cash. The current ratio is healthy at 1.6x. While liquidity ratios are strong, cash balances are low in dollar terms, suggesting large expenses could require borrowing or rate increases. Council approved financial policies require the utility to maintain at least a healthy 180 cash in the enterprise fund.

MANAGEABLE DEBT BURDEN

Storm water debt levels are moderate and affordable. Debt per customer is moderate at $1,656 per customer, though debt to net plant assets is elevated at 67%, reflecting recent borrowing to acquire and construct many system assets. The debt burden is projected to decline gradually to about $1,327 over the next five years with no further issuance planned and gradual amortization. Amortization is somewhat slow with 33% of debt paid down in 10 years and 78% in 20. The full principal will be repaid in 24 years. The debt structure is uncomplicated with level debt service and a debt portfolio composed entirely of fully amortizing, fixed rate debt.

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

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

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

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer Sector' (December 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

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

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981980

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