Fitch Affirms Cedar Hill, UT's Utility Rev Bonds at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms the following rating on Cedar Hill, UT's (the city's) debt obligations:

--$5.08 million utility revenue and refunding bonds, series 2006 at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a net revenue pledge of the utility system.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE: While financial performance is adequate, debt service coverage has been lower than projected at 1.3x. The 'AA-' rating reflects Fitch's expectation that the city will continue to implement the planned annual rate increases recommended in a recent rate study that are required to improve coverage.

MANAGEABLE CAPITAL PLANS: Capital needs are limited given the young age of the city and currently moderate debt levels are expected to decline over time with no additional borrowing planned.

SUFFICIENT CAPACITY THROUGH BUILD-OUT: System capacity is sufficient with culinary water and pressurized irrigation systems and sewer treatment provided by the Timpanogos Special Service District.

STABLE, AFFLUENT SERVICE AREA: The system serves an affluent bedroom community with easy access to Salt Lake City and Provo and annual growth of less than 1% expected.

WHAT COULD TRIGGER A RATING ACTION

CONTINUATION OF NARROW MARGINS: Failure to improve coverage levels as expected through planned rate increases would place downward pressure on the rating.

CREDIT PROFILE

ADEQUATE FINANCIAL PERFORMANCE; RATE INCREASES NEEDED TO IMPROVE COVERAGE

Coverage declined in fiscal 2011 to a five-year low of 1.3x after a previously weakening in fiscal 2010 to 1.5x. During this time period debt service costs increased about 35% from 2008 to 2010 and connection fees steadily declined from a high of $430,000 in fiscal 2007 to $23,000 in fiscal 2011. While not pledged, an annual transfer from the water and sewer fund is made to cover half of the debt service on the 2006 excise tax bond, which was issued to construct the Public Works Building. Coverage after the transfers out was 1.4x in fiscal 2010 and just 1.08x in fiscal 2011. Cash remains good at 241 days on hand ($1.2 million) in fiscal year 2011 and an estimated $1.46 million in 2012.

Rate flexibility is good, with demonstrated willingness and ability to raise rates. Effective June 30 2010, the sewer base rate increased nearly $3 per month and sewer usage rate grew from $2.25 per 1,000 gallons to $2.85, a combined increase of about 27%. The following year, the base rate increased an additional $2.85 per month and usage increased 60 cents per 1,000 gallons. The city also increased pressurized irrigation usage rates, which are based on lot size, and storm drain fees in the last few years.

The average residential utility bill is within Fitch's threshold for affordability and in the mid-range compared to regional rates. A recently completed rate study recommended annual increases from fiscal 2013 through 2018 of 6.4% for water, 5.5% for sewer and 6.5% for storm drain with no rate increases recommended for pressurized irrigation. The increases, which must be approved by the city council on an annual basis, have been approved for fiscal 2013. The 'AA-' rating and Stable Outlook incorporate an assumption that planned increases will continue to be implemented.

Projected coverage with the planned annual increases from fiscal 2013 to 2018 is between 1.6x and 1.8x not including the transfer out for excise tax bond debt service. Without rate increases, projected coverage ranges from 1.4x in fiscal 2013 to just 1.0x in fiscal 2017 not including the transfer out, a level that would be inconsistent with Fitch medians for the 'AA' rating category.

MANAGEABLE CAPITAL PLANS

Per capita debt levels are moderate at about $792 and are expected to decline given the city's lack of additional borrowing plans. Further, most of the city's infrastructure is young, with the oldest part of the city built at around 1980. The city's capital plan includes about $2.38 million in water, sewer, storm drain and pressurized irrigation project spending through fiscal 2018. The ratio of free cash to depreciation is very low at just 8%, which supports the rate study's conclusion that rate increases are needed for system reinvestment.

AMPLE CAPACITY THROUGH BUILD-OUT

System capacity is good with groundwater pumping capacity at a combined 3 million gallons per day (mgd) for its two culinary wells and 0.9 mgd for the pressurized irrigation well. The city's culinary water is supplied by the Harvey well and Cottonwood well, which was built in 2007, and will cover the city through build-out. Water and sewer connections stood at about 2,400 for fiscal 2012. The city's pressurized irrigation system, begun in 2003 to lessen pressure on the culinary water supply, has about 2,000 connections. The sewer system's effluent is treated at the Timpanogos Special Service District (rated 'AA' with a Stable Outlook by Fitch). The city is currently 85% built out.

STABLE, AFFLUENT SERVICE AREA

The city, with a population of around 10,000, is located in northern Utah County, approximately 30 miles south of Salt Lake City and 10 miles north of Orem City. The city is a bedroom community, with the majority of residents commuting to the Salt Lake City and Provo/Orem areas for employment. Median household income in the city is 175% of the state and 190% of the nation. Unemployment within Utah County at 4.5% in September 2012 remained significantly below the national average of 7.6%.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011).

Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Contacts

Fitch Ratings
Primary Analyst:
Shannon Groff, +1-415-732-5628
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Scott Monroe, +1-415-732-5618
Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Shannon Groff, +1-415-732-5628
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst:
Scott Monroe, +1-415-732-5618
Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com