Fitch Upgrades Orem, UT's Water and Storm Sewer Revs to 'AAA'; Outlook Stable.
--Approximately $5.1 million water and storm sewer revenue refunding bonds, series 2016.
The Rating Outlook is Stable.
The bonds are secured by net water and storm sewer system (the system) revenues after payment of maintenance and operations expenses.
KEY RATING DRIVERS
IMPROVED OPERATING MARGINS DRIVE UPGRADE: Rate increases in recent years have increased operating revenue, improving free cash flow (FCF) that is expected to support increased capital spending and generate debt service coverage over 6.0x.
FAVORABLE DEBT PROFILE: Debt metrics are stronger than similarly rated systems and amortization is rapid. The debt burden will continue declining as the city has no plans to issue additional water and storm sewer bonds over the next five years.
INCREASED, MANAGEABLE CAPITAL PLAN: The combined water and storm sewer capital improvement plan (CIP) totals about $47 million, up from the 2017 CIP totaling $25 million. The increase is attributable to the addition and reprioritization of projects identified in system master plans, but remains manageable in scope.
AMPLE WATER SUPPLIES: The water system benefits from an ample, secure supply of water that requires limited treatment and allows the system to offer affordable rates and to sell surplus water to a neighboring town.
HEALTHY SERVICE AREA: The city's water and storm sewer systems are monopoly providers of essential services to a suburban service area with healthy economic performance.
ABILITY TO SUSTAIN HEALTHY METRICS: Orem's water and storm sewer system's rating is sensitive to its ability to sustain financial and debt metrics that are commensurate with the rating level.
The state's fifth-largest city, Orem is located 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 nearing 100,000. Unemployment is low at just 2.7% (April 2018), below state and national rates. Income levels are approximate to the national level but slightly below the state's median.
The water system, which provides about 75% of the revenues pledged under the indenture, serves about 23,000 customers. The customer base increased about 1% annually for the last five years. The system also sells water to the town of Vineyard through a long-term wholesale contract that provides about 2% of water revenues annually.
STRONG FINANCIAL POSITION EXPECTED TO CONTINUE
The upgrade is driven by rate increases in recent years that improved operating margins, generated very strong DSC, and added to the system's ample cash reserves. As of fiscal 2017, DSC is 5.6x and averaged a very strong 4.5x over the last three years. The system transfers to the general fund to reimburse for the city's own water usage, yet coverage net of transfers is still very strong at 5.1x. FCF has also improved annually since 2013.
Fitch deems management's forecast through fiscal 2022 reasonable in its assumptions. Fiscal 2018 estimates are based on year-to-date figures through May (fiscal year-end June 30), and fiscal 2019 is based on the approved budget. Out year assumptions in revenues and expenses are also considered reasonable. DSC is expected at over 6.0x through the five year horizon and FCF should support most, if not all, of the planned capital spending. The system maintains robust liquidity, which has also improved annually since fiscal 2013. At nearly 700 days cash on hand as of fiscal 2017, ample cash is available should some be needed for capital projects.
LOW DEBT BURDEN TO CONTINUE DECLINING
Debt levels are low and expected to continue decreasing in the upcoming years. Debt per customer of about $400 and debt/funds available for debt service (FADS) of 1.9x in fiscal 2017 both compare favorably with 'AAA' medians of $1,078 and 3.5x, respectively. Other debt metrics also compare favorably with similarly rated systems, including rapid amortization, with 100% of outstanding debt repaid within 15 years. Metrics should remain favorable for the rating level as no new debt is planned for at least five years.
UPDATED CAPITAL PLAN REMAINS MANAGEABLE
The current combined CIP (2019-2023) totals about $47 million; water projects account for $35.5 million while the remaining $11.5 million will go toward storm sewer projects. The largest projects are a new storage tank and well ($15 million) and the implementation of advanced meter infrastructure ($10 million). While only accounting for about $3.3 million of planned spending, the storm sewer system also needs to complete replacement conveyance projects for storm water currently conveyed via the West Union Canal. The canal is expected to be abandoned by the West Union Canal Company in upcoming years and the city will be completing projects to alternately convey the storm water.
The scope of the CIP remains manageable even after the inclusion and reprioritization of projects based on master plans completed for both systems in 2015. The plan is expected to be funded on a pay-go basis, with cash reserves possibly funding a small portion of water projects. Fitch expects liquidity will remain largely intact, based on management's financial forecast that reflects FCF sufficient to cover planned annual capital spending.
SOLID RATE DISCIPLINE, ADEQUATE FLEXIBILITY REMAINS
The city council has approved multi-year rate plans for both the water and storm sewer system, but the increases must be approved annually as part of the budget process. To date, the proposed rate increases have been adopted as planned. Based on Fitch's usage metric of 7,500 gallons of water per month, a current residential bill is about $23 with a high 75% of the bill recouped through fixed charges. The balance is recouped through tiered, volumetric rates. The bill equates to just 0.5% median household income (MHI) and falls well below Fitch's affordability threshold of 1% of MHI. Fitch notes though that actual residential usage is much higher at about 28,000 gallons/month, but current rates still result in an average bill that falls slightly below the 1% threshold.
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 annual demand 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%.
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, along with water for the neighboring city of Provo.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Sep 28, 2018|
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