OREANDA-NEWS. Fitch Ratings has affirmed its 'AA-' rating on the city of Bountiful, Utah's $12 million of electric revenue bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a lien on net revenues derived by the city from the operation of its electric utility. Net revenues include all revenues, fees, income, rents and receipts of the utility, as well as interest subsidies from the federal government.

KEY RATING DRIVERS

SMALL, DIVERSIFIED RETAIL UTILITY: The city of Bountiful, located approximately eight miles north of Salt Lake City in southern Davis County, operates a retail electric utility that is relatively small and largely residential. The system benefits from a diverse and stable power supply, including its participation in the Utah Associated Municipal Power Systems (UAMPS), and a strong financial profile.

HEALTHY FINANCIAL PROFILE: Healthy reserves and cash flows continue to support the rating. Financial metrics compare favorably to rating category and notch-specific medians. Fitch views the utility's robust liquidity (460 days cash on hand), solid debt service coverage (4.22x), and low debt levels (82.3% equity-to-capitalization) as key credit strengths.

DIVERSE POWER SUPPLY CONTRACTS: A diverse power supply consisting of owned and contracted resources of various fuel types mitigates asset and fuel concentration risks, and enhances economic control over energy resources. The utility's strategy of adding owned gas-fired generation has proven beneficial.

SOLID SERVICE TERRITORY WITH MANAGEABLE CONCENTRATION: The healthy, predominately residential service area includes above-average wealth indicators and historically low unemployment rates. While commercial and industrial customers present some concentration risk, Fitch notes the flexibility of the system's power supply contracts mitigates this risk.

CONSISTENT, TIMELY RATE ADJUSTMENTS: The collaborative working relationship between the city council and management supports consistent, timely rate adjustments. Rates are modestly above the 2015 state average, and appear to be affordable for the service area.

RATING SENSITIVITIES

POWER SUPPLY CHANGES: Bountiful's power supply is expected to evolve over the medium term in response to environmental regulations and the expiration of existing contracts. Any material weakening to the utility's financial strength or relatively low debt levels could result in downward rating pressure.

CREDIT PROFILE

The city of Bountiful has owned and operated an electrical system through its department of light and power since 1935. The system is relatively small and largely residential, located approximately eight miles north of Salt Lake City in southern Davis County. Fitch believes it benefits from a diverse, stable power supply and a strong financial profile.

The system's healthy service area includes above-average income levels and historically low unemployment rates. Of its approximately 16,700 customers, 92% are residential, which adds stability and predictability to system finances.

Concentration risks are somewhat present with the single largest ratepayer accounting for approximately 9% of total revenues on average since 2011; however, the system's flexible purchase power contracts allow for reduced load and mitigate this risk.

HEALTY FINANCIAL PROFILE

Financial metrics weakened somewhat in fiscal 2015 due to costs associated with repairing one of the city-owned natural gas-fired peaking units, but remained in line with rating category medians. Debt service coverage and coverage of full obligations were 4.40x and 1.40x, respectively, compared to rating category medians of 2.46x and 1.41x. Financial performance is projected to improve and return to more baseline levels in fiscal 2016, and remain solid through the fiscal 2020 planning period.

The utility's liquidity levels remained strong in fiscal 2015 with approximately $26.4 million or 460 days cash on hand.

STEADILY DECLINING LEVERAGE

Bountiful's debt levels are expected to remain relatively low with no planned debt issuances. The system's capital needs through 2022, which amount to $12.3 million, are expected to be funded through a combination of reserves and operating cash flow. The series 2010 bonds are the system's only outstanding bond issue. The bonds will be fully repaid in 2031.

DIVERSIFIED RESOURCE PORTFOLIO

Fitch views Bountiful's power supply, consisting of contracted resources and owned assets, as a credit strength. Agreements with UAMPS and the Western Area Power Administration provide considerable diversity in terms of fuel types and resources. Owned natural gas units, which supply intermediate and peaking power, provide flexibility and act as a physical hedge against higher wholesale prices.

Resource planning initiatives to address capacity needs and environmental regulations, including potential participation in UAMPS' proposed small modular nuclear project, could present additional challenges over the longer term.