Fitch Rates City Of Orem, Utah, $5.7MM Water & Storm Sewer Revs ‘AA’
Fitch Ratings assigns an ‘AA’ rating to $5.7 million City of Orem (Utah County, Utah) water and storm sewer revenue bonds, series 2008. In addition, Fitch affirms the ‘AA’ rating on the city’s $19.9 million in outstanding water and storm sewer revenue bonds, $20 million in outstanding general obligation bonds, and $10.5 million in outstanding sales tax revenue bonds. The Rating Outlook is Stable.
The bonds are expected to sell by negotiation on Feb. 26, 2008. The bonds are secured by a net revenue pledge of the city’s water and storm sewer systems. Proceeds will be used to fund capital improvements to those systems.
The ‘AA’ rating reflects the city’s ample and secure water supply, low rates, and ability to sell surplus water to an adjacent town. The city’s established water and storm sewer systems have manageable capital improvement needs, low debt levels, and no regulatory issues. Since service area growth is steady, management can focus on maintenance issues. The systems’ financial operations are stable and projected debt service coverage is very strong. Legal provisions provide adequate bondholder protections.
Orem, situated about 40 miles south of Salt Lake City, is well located in the fast growing Provo-Orem metropolitan area. Orem’s own growth has been more moderate, with the population increasing just over 9% since 2000 to approximately 92,000. Although the city’s socio-economic indicators are somewhat mixed, reflecting a heavy concentration of youth and students, the city has been benefitting from positive labor force and employment trends with approximately 25% growth since 2000. The city’s unemployment rate decreased from 6.3% in 2002 to 2.5% in November 2007. This is in line with Utah as a whole, and much lower than the nation’s November 2007 unemployment rate of 4.7%. Orem is a retail hub for the area, with the city’s per capita retail sales representing 133% of the statewide average in 2005.
Orem benefits from an ample water supply received from a combination of spring, well, storage, and surface water. The city owns the rights to spring and well water and the Metropolitan Water District of Orem (MWDO) owns the rights to storage and surface water. Although separate from the city, the MWDO is responsible for acquiring, developing, storing, and selling water for the benefit of the city. MWDO board members are appointed by the city.
Financial operations are sound. In fiscal 2007, the combined operating margin for the water and storm sewer systems was 30%. Annual debt service (ADS) coverage based on fiscal 2007 revenues provided a solid 4.4 times (x) coverage, while maximum annual debt service (MADS) coverage was also strong at 2.4x coverage. Liquidity was solid at 210 days cash on hand in fiscal 2007, while the number of days of operating revenue in accounts receivable was low at 30, reflecting good collections. Furthermore, the city’s water rates, despite recent increases, remained among the lowest in the area, providing additional financial flexibility.
Financial projections, which include reasonable revenue and expenditure growth assumptions and a 2008 rate increase, show a very strong 11.2x ADS coverage ratio and a 7.7x MADS coverage ratio in fiscal 2012. Debt ratios are low. The city anticipates that it will issue bonds in the next two to three years, to be repaid by sanitary sewer fee revenues, to fund expansion of its sewer treatment plant.
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