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

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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