SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings on the city of Clearfield, Utah's debt:
--$1.5 million water revenue bonds at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are backed by a first lien on revenues of the city's water enterprise after payment of operations and maintenance expenses.
KEY RATING DRIVERS
CONSISTENTLY STRONG FINANCIAL PERFORMANCE: Debt service coverage (DSC) and liquidity are consistently strong. Free cash to depreciation is adequate.
DISCIPLINED RATE SETTING: The City Council has approved consistent, but modest rate increases to maintain strong financial performance. Rates are reasonable, suggesting adequate rate flexibility.
VERY LOW DEBT BURDEN: Debt per customer is very low and declining due to rapid amortization of outstanding debts. The city has no plans to issue additional water revenue debt over the next five years.
SOLID CUSTOMER BASE: The utility is the monopoly provider of essential retail water services to an established suburb on Utah's economically vibrant Wasatch Front. The city's economy is dominated by the defense sector. The customer base is reasonably diverse in terms of payers 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).
RATING SENSITIVITIES
FINANCE, DEBT PROFILE DETERIORATION: The rating is sensitive to shifts in fundamental credit factors, particularly weakening of the enterprise's healthy debt and financial profiles. The Stable Outlook means that Fitch believes such changes are unlikely over the next two years.
CREDIT PROFILE
Clearfield is city of about 30,500 people, situated 30 miles north of Salt Lake City next to Hill Air Force Base.
STRONG FINANCES
Financial performance is healthy. Revenue bond DSC (excluding capital contributions and net of transfers out) averaged a robust 3.3x over the past three years. Coverage was very strong at 2.9x in fiscal 2014. Unaudited results for 2015 show coverage improving to 3.5x. Coverage has varied somewhat with weather and demand but has remained very strong since the bonds were issued in 2007. The utility's debt strong DSC is more in line with higher rating categories due in part to the very low debt burden.
Measures of overall financial performance show healthy but not extraordinary underlying financial performance. Free cash-to-depreciation averaged a solid 104.6% over the three years ended June 30, 2015. The utility's operating margin averaged 37% over the period. Both measures are in-line with the 'AA' rating category.
Liquidity is strong, providing a cushion against revenue variability. The utility had $4.2 million of unrestricted cash and investments at the end of fiscal 2014, equal to 662 days operating cash.
REASONABLE RATES, GRADUAL INCREASES
Rates are very low by national standards with 7,500 gallons of water costing just $18.06, or 0.5% of median household income (MHI). Fitch considers rates affordable if 7,500 gallons of water costs less than 1% of MHI. Rate flexibility is probably more limited than the standard calculation suggests. The local populace is quite conservative, and actual water usage is very high in this arid suburban area, where lawn watering pushes demand up to an average of 28,000 gallons per household. At actual usage, bills equal about 0.7% of MHI. Given expectations for inflation-like rate increases over the next five years, rate flexibility appears to be solid.
LOW DEBT BURDEN
The utility's debt profile is strong with very low debt levels, rapid amortization and no immediate borrowing plans. The debt burden is about 30% of the median for 'AA' category water and sewer agencies at $580 per customer and $128 per capita. Debt is forecast to decline to a very low $306 per customer or $68 per capita over the next five years. Amortization is rapid with 95% of debt repaid in 10 years and all debt repaid within 15 years.
Capital needs appear manageable, although the system's elevated average age of plant (18 years) and high unaccounted for water loss (about 13%) suggest that the utility will face continuing pressure to update its aging plant. The city plans to invest about $1.3 million into renewal of the aging water system annually over the next five years with capital expenditures averaging a healthy 150% of depreciation over the period. It 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 sound, but economically concentrated. The city's economy is dominated by Hill Air Force Base and related defense industries. City residents also have access to job opportunities in the much larger, more diverse regional economy, somewhat reducing the risk of economic concentration.
Customer concentration is relatively moderate with the top 10 accounts providing 15.7% of water revenues and no sectoral concentration apparent among the top payers. The utility sells about two-thirds of its water to residential customers, providing a diversity of payers and stability to sales revenues. The city's unemployment rate was well below the national average at 4.6% in August 2015. MHI is somewhat low at just 91% of the U.S. level.
Additional information is available at 'www.fitchratings.com'.
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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993609
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993609
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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