Fitch Affirms Cedar Hills, Utah's Utility Revs at 'A'; Outlook to Negative

AUSTIN, Texas--(Business Wire)--
In the course of routine surveillance, Fitch Ratings affirms its 'A' rating on
the City of Cedar Hills, Utah (the city) $5.6 million of outstanding utility
revenue and refunding bonds, series 2006. The Rating Outlook is revised to
Negative from Stable.

Revision of the Outlook to Negative from Stable reflects rising debt service
costs of the city's combined culinary water, sewer, and pressurized irrigation
system (the system) that have not been offset by increases in rates.
Consequently, annual debt service (ADS) coverage for unaudited fiscal 2009 was
minimal, excluding one-time revenue sources, and fiscal 2010 results are
expected to show little improvement. Failure by the city to boost net revenues
to levels comfortably above the system's rate covenant in the upcoming fiscal
year likely would lead to negative rating action.

The 'A' rating reflects the system's historically adequate financial
performance, moderate debt levels, sufficient water supplies, and limited,
albeit relatively affluent, service area. Currently financial metrics are
favorable, but the system is experiencing fixed cost pressures that could erode
future financial results. Capital costs are relatively minor, which should limit
the need for future borrowings. However, additional rate hikes are needed in the
near-term to maintain historical financial margins.

Financial results since fiscal 2004 generally have been good, although declining
connection fees and rising fixed costs reduced ADS coverage to 1.6 times (x) in
fiscal 2007. For fiscal 2008 operating revenues improved pushing ADS coverage to
above 2.1x and for fiscal 2009 unaudited results point to further improvement to
2.5x. However, with fiscal 2009 coverage was boosted by an $870,000 one-time
booking of non-operating revenues recognized during that year that represented
deposits collected over previous years. Without this source of revenue ADS
coverage would have been a marginal 1.0x, well below the system's 1.25x rate
covenant.

While recurring revenues were essentially flat, debt service costs increased for
fiscal 2009 and will rise further in fiscal 2010, which will continue to
pressure margins. Fitch is concerned about the potential that the city may
violate its rate covenant for fiscal 2010 and that ongoing violations will occur
thereafter without additional increases to user charges. Currently, there are no
plans for additional rate increases beyond pass-through adjustments related to
the city's wholesale sewer treatment provider. However, the city has
demonstrated a willingness to raise rates in the past and rates are low relative
to income, providing ample margin for upward adjustment.

System debt levels are moderate and should improve over the next five years
relative to other comparably-rated systems given the lack of additional
borrowing plans. Relatively modest capital needs through the intermediate term
should provide the system sufficient funding flexibility. Growth projects
through fiscal 2013 relate solely to expansion of sewer lines, but the city
reports that these projects will be funded from connection fees already
collected.

The city, with a population of around 10,000 people, is located in northern Utah
County, approximately 30 miles south of Salt Lake City (SLC) and 10 miles north
of Orem City. The city is a relatively affluent bedroom community, with the
majority of residents commuting to the SLC and Provo/Orem areas for employment.
Median household income is around 135% and 150% of the state and nation,
respectively. Unemployment within Utah County has increased with the recession,
but the county's 5.7% rate for July 2009 remained significantly below the
national average.

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

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Fitch Ratings
Doug Scott, +1-512-215-3725 (Austin)
Robert Sakai, +1-415-732-5628 (San Francisco)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com

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