OREANDA-NEWS. Fitch Ratings affirms the following City of South Jordan, Utah's (the city) outstanding water revenue bonds at 'AA':

--\$7.3 million water revenue bonds, series 2009;
--\$19.8 million water revenue refunding bonds, series 2007.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are special limited obligations secured by a first lien on and pledge of net revenues of the water system.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The Positive Outlook reflects the system's improved financial margins. Debt service coverage (DSC) for fiscal years 2013 and 2014 improved to over 2.6x and cash balances have improved as well.

LOW DEBT: The debt profile is favorable with debt per customer of \$1,250 comfortably below the 'AA' category median of \$1,934. Debt levels are expected to remain low as the city has no immediate debt plans and principal debt amortization is rapid.

LIMITED OPERATING RISK: The city's operational risk is limited. South Jordan purchases its water supplies and its own assets are limited to the retail delivery network of distribution lines and pumps.

FAST PACED GROWTH: While service area growth has been rapid with customer accounts increasing by 4% on average for the past five years, the city is positioned to accommodate growth. A recently renegotiated supply agreement with their wholesale provider is expected to provide adequate water supply to meet area demand in the intermediate term.

WHOLESALER COST PRESSURE: The city is susceptible to operating cost pressure from its wholesale water provider but this risk is mitigated by the city's rate flexibility.

RATING SENSITIVITIES

CONTINUED STRONG FINANCIAL PERFORMANCE: The Positive Outlook reflects Fitch's expectation that a continued trend of strong DSC, excluding impact fees and robust cash balances would likely result in a rating upgrade.

CREDIT PROFILE

The city is located in southwest Salt Lake County, just 17 miles south of Salt Lake City and connected by Interstate 15. The city is far from being built out, so it has considerable development potential. Growth has been rapid with the population increasing by 18% since the 2010 census and by 75% the decade prior. The 2014 estimated population is over 59,000 and growth is anticipated to continue to an estimated build-out population of over 115,000 by 2040. Wealth levels are well above state and national averages and unemployment is low at 2.8% in December 2014.

The system primarily provides potable water service to city residents through its culinary system and irrigation water to a limited number of customers through its secondary water system. As residential and commercial development occurs, it is often through the conversion of previously irrigated land within the city's service area. Therefore, the rapid pace of customer growth is not necessary accompanied by an equal increase in water demand, but a conversion of water demand from irrigation water to treated culinary water. Customer accounts (culinary and secondary water) total around 22,000 with growth averaging a brisk 4.2% annually over the past five fiscal years.

GROWING WHOLESALE WATER COSTS

Culinary water is supplied by the Jordan Valley Water Conservancy District (JVWCD; water revenue bonds rated 'AA' Positive Outlook by Fitch), a regional wholesale provider, through a perpetual take-or-pay contract. Water costs associated with the JVWCD contract increased 25% in fiscal 2012 due the combination of a 5% increase in purchased water costs and a 10% increase in overall demand. Water demand remained flat in fiscal 2013 and even declined slightly in fiscal 2014.

In fiscal 2013, the city revised its contract with JVWCD, increasing the minimum purchased water amount to over 11,000 acre feet (af), up from 9,700 af. JVWCD rates through the forecast period are anticipated to increase 5% annually and currently purchased water accounts for a high 60% of total operating expenditures. The newly revised minimum purchased water agreement with JVWCD provides the city with adequate supply for the intermediate term.

IMPROVED FINANCIAL PROFILE

The financial profile of has seen improvement over the last two fiscal years, both through increased operating revenues and connection fees. DSC grew to 2.6x in fiscal years 2013 and 2014. DSC is also strong excluding connection fees at over 2x. In the event that growth slows, financial margins are expected to remain strong. Liquidity is also robust with cash of over \$19 million in fiscal 2014. While this includes around \$5 million in a capital reserve, cash is still healthy given the utility's risk profile. Since the operating environment is stable and capital needs are manageable, liquidity is projected to remain strong.

Management's financial forecast appears reasonable, strong annual customer account growth of about 5% expected to continue and annual 5% increases in purchased water costs. Impact fee revenue projections are higher than the most recent actual results, but giving the area's rapid growth, the higher projections could come to fruition. Based on these assumptions, DSC including impact fee revenue, is forecast to remain strong at over 2.7x through fiscal 2019; with DSC excluding all impact fee revenue forecast at a still very health 2.2x to 2.4x over the same period.

STRONG RATE STRUCTURE

User rates are affordable and retain adequate flexibility. In April 2009, the city adopted a five year rate package; however, the planned 5% rate increases have not been adopted since certain expenses have come in under budget and JVWCD did not increase its wholesale rates. The area's rapid growth has led to increased operating revenues without the need for rate increases and the city does not anticipate raising rates over the next five years. The city plans to undertake a rate study by fiscal 2016 to ensure revenue sufficiency.

Fitch views the city's rate structure as credit positive. A sizable base charge accounts for 68% of water charges, providing a good deal of revenue stability. The average current bill is competitive at just over \$50 and represents 0.7% of median household income (MHI), well under Fitch's affordability threshold of 1% MHI.

CAPITAL NEEDS FUNDED FROM REVENUES

Debt levels are low and the city doesn't anticipate additional debt to fund its capital improvement plan (CIP). While a portion of the city's CIP is growth-related, the city's current CIP is focused on system maintenance. The total CIP equals a manageable \$8.7 million or \$392 per customer. The culinary system accounts for over 90% of planned capital spending, although the city plans to continue to invest in its secondary water system. Funding for the expansion of the secondary water system will come primarily from developer contributions as future land development occurs.