Fitch U.S. Muni Surveillance: Cleburne, Texas Water & Sewer Revs Affirmed at 'A+'.

AUSTIN, Texas -- In the course of routine surveillance, Fitch Ratings affirms the 'A+' rating on Cleburne, TX's (the city) $19.8 million of outstanding senior lien water and sewer revenue bonds. The bonds are special obligations of the city and are payable solely from a senior lien on and pledge of the net revenues of the city's waterworks and sewer system (the system) revenues. The Rating Outlook is Stable.

The 'A+' rating reflects the system's good debt service coverage and liquidity, maintenance of a rate mitigation fund and a growing service area. The rating also reflects the high utility bills and elevated leverage ratios, although the leverage ratios are expected to improve over the next few years. The city has experienced above-average water loss but is addressing this issue along with a long-term sustainable supply in light of recent growth. In any event, the city continues to operate at favorable levels and performance is expected to show continued improvement over the next five years.

Located in the Dallas-Fort Worth metroplex, Cleburne is 30 miles south of Fort Worth and 55 miles southwest of Dallas. As the former site of Santa Fe Railroad's shop yard, the city's economy diversified into manufacturing and distribution after the yard closed in the 1980s. As the seat of Johnson County, its estimated 2008 population of 30,000 is approximately 20% above its 2000 census level.

The waterworks and sewer system provides treatment, distribution, collection and disposal services within Cleburne's city limits and certain outlying areas. In fiscal 2007, the city served 11,196 water customers and 10,110 sewer customers. Lake Cleburne is the city's primary water source, which is supplemented with water transported from Lake Aquilla via a 34-mile pipeline. A local well field provides additional water for peaking purposes. The city's water supply will be adequate through 2045 due to its remaining water rights with the Brazos River Authority, newly acquired rights for return flows from its wastewater treatment plant in the Brazos River basin, and an active water reuse program. However, additional conveyance, distribution and treatment works will be required at a later date to deliver these supplies to the city.

Financial performance has been good. The system performance has been improving since fiscal 2004 as evidenced by higher coverage and healthy operating margins. The city's internal goal is to maintain 1.4 times (x) coverage with ongoing revenues and 1.6x including the rate mitigation fund. Senior debt service coverage increased to 2.1x in fiscal 2007 from 1.4x in fiscal 2004. All-in coverage in fiscal 2007 is slightly more reduced at 1.8x. Currently, coverage is expected to increase over time on a senior and subordinate basis, assuming the city's debt plans remain moderate, annual rate hikes averaging 3% are in full effect and pay-go funding is limited. For fiscal 2007, the city maintained 267 days cash and 167 days of working capital, including the rate mitigation fund. Liquidity is enhanced by the rate mitigation fund which totaled $2.8 million as of fiscal 2008, funded with revenues in excess of 45 days worth of reserves. To date the city has made no draws on the fund.

Water and sewer rates are currently high at 2.3% of median household income as of fiscal 2007 compared to the category 'A' median of 1.6%, but are reportedly low relative to certain neighboring providers. Rate hikes are projected at 3% annually over the next five years, which will push costs to customers higher. Despite the rising cost of service, the city consistently has demonstrated the willingness to raise rates as needed to pay for capital and preserve financial margins.

Capital costs through 2013 are notable at $42 million. Funding for the capital program is expected to be derived partly from a deferred, subsidized loan from the Texas Water Development Board which will accrue no interest from the time of issuance to the start of construction (approximately 2013). Leverage ratios currently are high, with outstanding long-term debt per customer of $3,117 in fiscal 2007, over 2x the 'A' category median. However, the leverage ratios are projected to decline somewhat over the next five years given the city's limited intermediate-term borrowing plans. Amortization is currently rapid with 49% and 100% of debt amortizing in the next 10 and 20 years, respectively.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework' available at www.fitchratings.com.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in first quarter-2009.

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