November 30, 2012 / 9:11 PM / in 5 years

TEXT - Fitch affirms Clearfield, Utah water revs

Nov 30 - Fitch Ratings has affirmed its ‘AA-’ rating on the following Clearfield, Utah water revenue bonds: --$2.2 million, series 2007. The Rating Outlook remains Positive. SECURITY The bonds are secured by net revenues of the city’s water enterprise after payment of operations and maintenance expenses. KEY RATING DRIVERS STRONG DEBT, FINANCIAL PROFILES: The Positive Outlook reflects continued strong financial performance, low debt burden and disciplined rate setting. CONSISTENTLY STRONG FINANCIAL PERFORMANCE: Debt service coverage has averaged a robust 3.1x over the three years ended unaudited fiscal 2012. Liquidity was very strong at the end of 2012 with cash equaling 824 days of operating expenses. DISCIPLINED RATE SETTING: The city council has approved consistent, but modest rate increases of 3% to 4% a year to maintain strong financial performance. Rates are near Fitch’s affordability threshold of 1% of median household income but remain competitive compared to other regional providers. VERY LOW DEBT BURDEN: Debt per customer is very low at $729 per customer or $154 per capita and declining due to rapid amortization of outstanding debts. The city has no plans to issue additional water revenue bonds over the next five years. DIVERSE, HEALTHY CUSTOMER BASE: The utility provides essential retail water service to 30,100 residents of an established suburb about 30 miles north of Salt Lake City. The customer base is diverse and mostly residential. ADEQUATE WATER SUPPLIES: The city benefits from access to an adequate, relatively low cost supply of water under long-term contracts with the Weber Basin Water Conservancy District (revenue bonds rated ‘AA+’ with a Stable Outlook). WHAT COULD TRIGGER A RATING ACTION PROGRESS ON INTERFUND LOANS: Fitch expects to upgrade the water revenue bonds to the ‘AA’ over the next year if audited financial results show that the general fund repaid a short-term loan from the water fund as shown in preliminary, unaudited 2012 results and if the water utility continues to deliver strong overall financial results. CREDIT PROFILE STRONG FINANCIAL PERFORMANCE Clearfield’s water fund has produced financial metrics that exceed the medians for ‘AA’-rated water agencies for some time. Over the past three years, debt service coverage has ranged from a high of 3.6x in 2012 to a low of 2.7x in 2011, varying with weather and demand cycles but remaining very strong throughout the period. The utility’s strong debt service coverage has allowed the city to build significant cash balances in the water fund, which provides a strong cushion against revenue variability and enables the utility to maintain its capital infrastructure with little borrowing. The city projects unrestricted cash and investments to rise to $5.1 million, or 824 days cash, in 2012 from $3.2 million, or 496 days cash, in 2011. The 2011 balance was reduced by short-term loans of $2.2 million to other city funds. The utility’s cash balances remained healthy even after the loans, and preliminary results for fiscal 2012 show that the general fund repaid about half of the outstanding loan. The other half is a long-term loan that will be repaid gradually over the next decade. Fitch plans to wait to upgrade the bonds until the repayment is confirmed in audited financial results. LOW DEBT BURDEN The utility’s debt profile is strong with very low debt levels, rapid amortization and no immediate borrowing plans. Debt per customer is forecast to decline to a very low $464 per customer or $93 per capita over the next five years. Amortization is rapid with 87% of debt repaid in 10 years and all debt repaid within 16 years. The city plans to invest about $1 million into renewal of the aging water system annually over the next five years, with capital expenditures averaging a healthy 132% of depreciation over the period. The city plans to pay for the improvements entirely from the system’s cash flows with no further borrowing. SOLID SERVICE AREA The utility’s service area is healthy and benefits from its location along the economically vital Wasatch Front, where about 80% of Utah’s population resides. The city’s economy is dominated by Hill Air Force Base and related defense industries, but city residents also have access to job opportunities in the much larger, more diverse regional economy. Despite the economic concentration, customer concentration is relatively moderate with the top 10 accounts providing 15.9% of water revenues and no sector concentration apparent among the top payers. The utility sells about 65% of its water to residential customers, providing a diversity and stability to sales revenues. The city’s unemployment rate was well below the national average at 6.2% in October. Median household income is somewhat low at just 89% of the U.S. level.

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