Fitch Ratings has assigned an 'AA-' rating to the following Provo, UT (the city) obligations:
--$10 million wastewater revenue bonds, series 2015.
The Rating Outlook is Stable.
The bonds are expected to sell via competition on or around January 20. Proceeds will be used to finance the installation of an ultraviolet disinfection system, completion of a new headworks building at the wastewater treatment plant, two new lift stations on the west side of the city, a gravity flow line extension, and forced sewer main lines.
SECURITY
The bonds are payable solely from net revenues of the wastewater system.
KEY RATING DRIVERS
SUFFICIENT PROJECTED COVERAGE: The system's projected debt service coverage (DSC) beginning in fiscal 2016 is healthy at a low of 5.0x, or 3.0x net of transfers. These coverage levels are dependent upon yet to be approved rate increases. However, assuming flat revenues at fiscal 2015 levels produces DSC of 3.5x, or just 0.81x net of transfers.
AMPLE RATE FLEXBILITY: The system benefits from very affordable rates providing ample revenue raising flexibility. Rates are expected to remain so despite increases, which will need to be approved annually, totaling a combined 67% over the forecast period.
ADEQUATE LIQUDITY: The system's historical cash balances have been adequate with a five-year average of approximately 20 months cash on hand. Management anticipates drawing down to about the system's minimum policy level of 25% of the following year's operating revenues in 2015 before recovering to historical levels over the next five years.
FAVORABLE DEBT PROFILE: Debt ratios are very low as this is the system's first borrowing; ratios remain low even including a planned borrowing in the five-year horizon. Amortization is rapid.
GOOD CAPACITY; IMPROVEMENTS NEEDED: Management estimates the system's treatment capacity is sufficient through at least the next 15 years. However, it expects a planned assessment of the plant to identify significant needed improvements requiring additional borrowing within the next 10 years.
STABLE SERVICE AREA: The system provides an essential service to a stable customer base with moderate concentration.
RATING SENSITIVITIES
DEPENDENCE UPON SIGNIFICANT RATE INCREASES: The system's forecast DSC is dependent upon somewhat steep rate increases in each of the next four years. The adequacy and timing of future rate increases will be important to future evaluations of credit quality.
ADEQUATE LIQUIDITY: Fitch expects the system to achieve at least forecast levels of liquidity. A failure to achieve these levels could place downward pressure on the rating. Conversely, sustained outperformance would be a credit positive.
FUTURE CAPITAL NEEDS UNCERTAIN: The completion of the wastewater treatment plant master plan in calendar year 2015 is expected to bring clarity to the scope of needed improvements and their impact on the system's financial profile. Capital needs in excess of those currently anticipated by management could pressure the rating.
CREDIT PROFILE
The city of Provo covers approximately 44 square miles in the central portion of Utah County 45 miles south of Salt Lake City. With a population of approximately 115,919, the city ranks as the third largest in the state and is home to Brigham Young University. The wastewater system serves 18,164 accounts, of which 91% are residential. The system consists of approximately 294 miles of wastewater collection mains, 13 lift stations, a wastewater treatment plant, and other wastewater system infrastructure.
SUFFICIENT PROJECTED COVERAGE
DSC is forecast to remain above 5.0x through fiscal 2019, or 3.0x net of transfers. However, the forecast is less than conservative as it includes the rate increases presented to the City Council but not yet approved through fiscal 2019. Other revenue increases of 1.5% each year appear reasonable and the forecast does not factor in any increases in connections. Operating expenditures assume modest annual increases of 1.5% versus actual flat spending over the five years ending fiscal 2014. Transfers increase at an average annual rate of 8% versus a historical average of 9%. City policy sets annual transfers from the utilities at 11% of operating revenues. In addition, the wastewater system makes annual transfers to the water system for the cost of shared services.
Assuming flat revenues at fiscal 2015 levels, DSC drops to 3.5x in fiscal 2019, or 0.81x net of transfers. Furthermore, management anticipates additional borrowing to occur in fiscal 2021 for treatment plant improvements. As such, both the planned rate increases through fiscal 2019 as well as subsequent hikes will be needed to maintain adequate coverage. Deviation from the planned increases could place stress on the utility.
ADEQUATE PROJECTED LIQUIDITY
Historical liquidity, averaging 589 days cash on hand over the five years ending fiscal 2014, has been good. Fitch considers the city's cash balance policy, equal to 25% of the following year's operating revenues, or about four months operating expenditures, to be somewhat low. System projections indicate drawing down the cash balance to near the policy level in fiscal 2015 before gradually increasing to about a year's cash in fiscal 2018. Drawing down to the policy level for a longer period than anticipated may not be commensurate with a 'AA-' rating.
RATE FLEXIBILITY
Rates are low relative to other cities and to Fitch's affordability threshold of 1% of median household income. Last increased about 39% in fiscal 2012, City Council unanimously approved a 20% rate hike in fiscal 2015 bringing the total to $17.96 per month, or 0.5% of median household income. Increases, which must be approved annually by Council, are estimated to range from 10% to 20% annually through fiscal 2019. Even so, rates are expected to remain affordable.
GOOD CAPACITY; POSSIBLE LONG-TERM IMPROVEMENTS NEEDED
The city owns and operates a wastewater treatment plant with average daily capacity of 21 mgd and peak capacity of 42 mgd. The city estimates additional capacity will be needed around 2030 with total capacity needed at build-out of about 35 mgd. The city is undergoing an update of its wastewater master plan and expects that improvements will be necessary to the plant over the next 20-year period to accommodate and facilitate expansion on the west side of the city. As such, management anticipates the issuance of additional debt in fiscal 2021, the amount of which is yet to be determined.
FAVORABLE DEBT PROFILE
Projected debt levels compare very favorably to medians given the system's lack of debt thus far. Per customer and per capita debt rise to $1,357 and $211, respectively, compared to 'AA' medians of $1,973 and $558. Amortization of the 2015 debt is rapid with 93% repaid within 20 years, compared to the 'AA' median of 77%. Approximately 43% of the system's capital plan is debt financed, which is in line with medians.
The system's five-year capital improvement plan (CIP) totaling $23.4 million includes $10 million in projects to be funded with bond proceeds as well as ongoing repair and rehabilitation. In addition, it includes an estimated $2 million for a nutrient removal project and $4 million for projects to be identified in the master plan, which is expected to be completed in calendar year 2015.
STABLE SERVICE AREA
Customer accounts have remained very stable the past five years, though mid- to longer-term growth is expected. Concentration is moderate with the top 10 customers comprising 11.6% of operating revenues. The largest, Brigham Young University, accounts for 6% and is also the largest employer. The city is home to Novell, Vivint, and a growing technology sector. Unemployment is low at just 3.2% in October 2014. Due in part to the sizeable student population, estimated at 25% of the city residents, incomes are lower than state and national levels.
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 CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964115
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