Fitch Affirms Orem, UT's Water and Storm Sewer Revs at 'AA+'; Outlook Stable

Fitch Ratings has affirmed the 'AA+' rating on the following Orem, Utah (the city) debt:

--$19.4 million water and storm sewer revenue bonds.

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 and high liquidity maintained across a variety of weather and economic conditions.

LOW DEBT BURDEN: Debt levels are low, with faster-than-average amortization, and the utilities' capital plans include no additional borrowing in 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

RATES AND FINANCES: 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. The rating is unlikely to move higher.

CREDIT PROFILE

The city of Orem is situated about 40 miles south of Salt Lake City and has a population of 90,750. The water system, which provides the bulk of the revenues pledged under the indenture, serves 21,807 customers and is growing gradually at about 1% a year. 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 debt service coverage has averaged a very strong 2.5x over the three fiscal years ended June 30, 2013. Coverage dips in rainy years when outdoor watering demand declines and reached a recent low of a still adequate 1.5x in fiscal 2010. Coverage was very strong at 2.8x in fiscal 2013.

The city expects coverage to remain above 2.0x across the forecast horizon (through fiscal 2018). The forecast - which conservatively assumes minimal demand growth and expense growth above inflation - appears reasonable. The city's strong liquidity positions it well to withstand occasional weather-related misses in the forecast. Unrestricted cash and investments rose to $8.6 million, or 418 days of operating expenses, at the end of fiscal 2013.

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 45% 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 4.6% annually from fiscal 2011 to 2015. Water rates remain low in comparison to other Utah communities and equal a moderate 0.4% of median household income (MHI) for 7,500 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 at approximately three times the national average (28 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.

MODEST DEBT BURDEN

Debt levels are low and likely to remain low over the next five years. Long-term debt per capita is modest at just $230 (compared to an 'AA' median of $514 for rated water and sewer utilities). Debt is also below average relative to the systems' capital stock at 39% of net plant assets.

Amortization is above-average with 61% 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 occasional storm water basin acquisitions to improve management of runoff that flows from nearby the town and nearby mountains 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 3.2% in May 2014. The regional economy is dominated by large, relatively stable governmental, educational and healthcare employers, including 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 100% of the national level, but only 91% of the state level. The city is home to about 4,500 businesses, including a retail hub around the 180-store University Mall.

The water system has a diverse customer base with just 4% of sales (by volume) to the top 10 customers and about 65% of revenues from residential accounts. The storm sewer system has a more concentrated customer base with about 20% of revenues from the top 10 customers. The top customer lists includes a mix of religious, governmental, educational, retail and commercial users with no sector concentration.

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 informed by information from CreditScope and IHS Global Insights.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841777

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