Fitch Ratings has assigned a 'AA+' rating to the following Orem,
Utah (the city) debt:
--$4.4 million water and storm sewer revenue bonds, series
2016.
The bonds are expected to sell via negotiation on or about Sept.
13, 2016. Proceeds will refund the city's outstanding series 2008
water and storm sewer revenue bonds for debt service savings and
will pay for cost of issuance.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by net water and storm sewer revenues
after payment of maintenance and operations expenses.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: Financial performance has been
strong with solid debt service coverage (DSC) and high liquidity
maintained across a variety of weather and economic conditions.
LOW DEBT BURDEN: Debt levels are low with rapid amortization.
The city has no plans to issue additional water and stormwater
bonds over the next five years.
HEALTHY SERVICE AREA: The Orem water and storm sewer systems are
monopoly providers of essential services to a suburban service area
with healthy economic performance.
AMPLE WATER SUPPLIES: The water system benefits from an ample,
secure supply of water that requires limited treatment and allows
the system to offer low rates compared to other Utah water
utilities and to sell surplus water to a neighboring town.
RATING SENSITIVITIES
LOW TRANSITION RISK: The rating is sensitive to shifts in
fundamental credit factors, particularly financial performance and
rate-setting behavior. The Stable Outlook means that Fitch does not
expect such changes.
CREDIT PROFILE
The 'AA+' rating reflects Orem's ample, secure water supply, low
rates, low debt, solid economic resource base and sound financial
performance. Utah's fifth-largest city, Orem is situated about 40
miles south of Salt Lake City and provides essential water and
storm sewer services to an economically resilient service area with
a population of 94,457 people. The water system, which provides the
bulk of the revenues pledged under the indenture, serves 22,634
customers and is growing at gradual pace. The system also sells
water to the town of Vineyard through a long-term wholesale
contract that provides about 2% of water revenues.
STRONG FINANCIAL PERFORMANCE
Financial operations are sound but variable due to the impact of
weather on water sales. All-in DSC has averaged a very strong 3.4x
over the three fiscal years ended June 30, 2015. Coverage dips in
rainy years when outdoor watering demand declines and reached a
recent low of a still adequate 1.5x in 2010. Coverage was very
strong at 3.8x in fiscal 2015.
The city expects DSC to remain at or near 3x across the forecast
horizon. The forecast, which conservatively assumes minimal demand
growth and expense growth above inflation, appears reasonable. But
the projected results depend on significant rate increases to fund
increased investments in the city's aging infrastructure. The City
Council has agreed to a timetable to increase rates but has not yet
approved the rates.
The city's strong liquidity positions it well to withstand
occasional weather-related misses in the forecast. Unrestricted
cash and investments rose to $12.7 million, or 484 days of
operating expenses, at June 30, 2015.
SOLID RATE DISCIPLINE, ADEQUATE FLEXIBILITY REMAINING
The city's water (about 75% of pledged operating revenues) and
storm sewer (25%) rate structures provide a reasonable degree of
revenue stability and predictability. Pledged storm sewer revenues
are based on flat fees per residence or equivalent service unit,
while fixed meter fees account for about half of the average
residential water bill.
The city's elected policymakers have shown good rate discipline,
and rate setting appears reasonably uncontroversial. The city has
made timely increases in water rates in recent years with rates
rising an average of 4.4% annually from fiscal 2011 to 2016. Water
rates remain low in comparison to other Utah communities and equal
a moderate 0.4% of median household income (MHI) for 7,480 gallons
or 10 hundred cubic feet (HCF) of water. Actual water use is much
higher than the national average consumption used in Fitch's
standard calculation in this arid region, but bills remain below
Fitch's 1% of MHI affordability threshold even with average use of
22 HCF.
Storm sewer rates are adjusted less frequently and equal just
0.1% of MHI. The storm sewer enterprise has limited operations,
requiring intermittent rate hikes timed around capital needs, not
the regular rate adjustments of a water enterprise. The city plans
to raise storm sewer fees to $8.60 per month from $6.25 per month
for a typical home over the next decade as it ramps up capital
spending on the storm sewer system.
MODEST DEBT BURDEN
Debt levels are low and likely to remain low over the next five
years. Long-term debt per capita is low at just $220 (compared to
an 'AA' median of $521 for rated water and sewer utilities). Debt
is also below average relative to the systems' capital stock at 37%
of net plant assets. Amortization is rapid with 75% of debt repaid
in 10 years and 100% in 20 years. The city's capital plans are
driven by maintenance of existing water infrastructure and
expansions of the storm drain system to improve management of
runoff that flows from the city in to Utah Lake. The city currently
has no borrowing plans for the utilities over the next five
years.
AMPLE WATER SUPPLIES
Orem benefits from a sufficient water supply provided by a
combination of spring, well and surface water fed by the winter
snows and spring rains of the nearby Uinta Mountains. The city owns
the rights to spring and well water that provide about 40% of its
water at low cost with minimal treatment. The Metropolitan Water
District of Orem (MWDO) owns the rights to storage and surface
water that supplies the remaining 60% of the city's water.
Although a separate legal entity from the city, the MWDO was
created to acquire, develop, store and sell water for the benefit
of the city, and the organization's board is appointed by the city.
The city currently has legal entitlement to about twice its average
daily water needs and expects its current supplies to be adequate
through at least 2035. Orem's surface water is treated by the
Central Utah Water Conservation District's Central Utah Project at
the Utah Valley Water Treatment Plant along with water for the
neighboring city of Provo.
SOLID SERVICE AREA
Orem's economy outperformed the national economy in recent
years. The city's jobless rate was quite low at 3.9% in June 2016.
The regional economy is dominated by large, relatively stable
governmental, educational and healthcare employers, including the
Brigham Young University in Provo and Utah Valley University in
Orem. The city also benefits from close proximity to the state's
biggest metropolitan area in Salt Lake City. MHI is healthy at 106%
of the national level but only 90% of the state level. The city is
home to about 4,200 businesses, including a retail hub around the
180-store University Mall.
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 Lumesis.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep
2015)
https://www.fitchratings.com/site/re/869223
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010885
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystAndrew
WardDirector+1-415-732-5617Fitch Ratings, Inc.650 California
StreetSan Francisco, CA 94103orSecondary AnalystAlan
GibsonDirector+1-415-732-7577orCommittee ChairpersonDouglas
ScottManaging Director+1-512-215-3725orMedia Relations:Elizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com