OREANDA-NEWS. Fitch Ratings has upgraded the ratings on the following Aurora, Colorado (the city) bonds to 'AAA' from 'AA+':

--$32.3 million first-lien wastewater and storm water system revenues bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by wastewater and storm water system (the system) revenues, including connection fees.

KEY RATING DRIVERS

UPGRADE REFLECTS STRONG FINANCIAL PROFILE: The upgrade reflects the system's continued strong financial metrics with 2015 debt service coverage (DSC) of over 11x and unrestricted cash reserves of $62 million, equal to over 490 days cash on hand (DCOH). Even after considering obligations to its wholesale wastewater provider, the Metropolitan Wastewater Reclamation District (MWRD), the system's profile remains strong.

LOW DEBT BURDEN: Debt levels are low relative to the category 'AAA' rating medians and should remain favorable despite planned debt financing of capital improvements over the next five years.

RATE FLEXIBILITY: Combined sewer and water charges register at 1.6% of median household income (MHI), which is below Fitch's 2% of MHI affordability threshold. Despite projected annual rate increases, the combined monthly bill should remain affordable over the next five years.

WHOLESALER COST PRESSURES: The city is susceptible to operating cost pressure from its wholesale wastewater provider. Payments to MWRD account for a meaningful 55% of operating costs in 2015.

RATING SENSITIVITIES

DECLINE IN FINANCIAL METRICS: The Stable Outlook reflects the expectation that financial metrics will remain strong for Aurora, Colorado's wastewater and storm water system. However, lower financial metrics that result from unexpected additional capital needs or a failure to pass-through wholesaler rate increases could pressure the rating.

CREDIT PROFILE

HEALTHY SERVICE AREA CHARACTERISTICS

The city's wastewater and storm water system provides mainly retail service to residents of the city of Aurora (rated 'AA'/Stable Outlook). The city is located adjacent to and directly east of Denver, and with a population in excess of 351,200 is the third largest in the state. Given the city's close proximity to downtown Denver and the Denver International Airport, its location along the light rail corridor and strong and growing employment base, the city's planning department is estimating population will grow at a rate of approximately 1.7% per year going forward; population growth has averaged around 2% annually over the past five years.

The city's unemployment rate is down year-over-year dropping to 3.6% in May 2016, compared to 4.6% the year prior; the rate is on par with the state (3.6%), above county (3.3%) but below national (4.5%) levels. Wealth levels are below state (91%) but above national (104%) averages. The city maintains core military/aerospace and retail economic elements but is also transforming into a major medical/bioscience center as redevelopment continues at Fitzsimons, a prior army base.

STRONG FINANCIAL METRICS

Financial performance is solid, characterized by very good DSC, healthy cash flows and strong liquidity. In addition, no transfers are paid to the city. For 2015, DSC was in excess of 11x. Management's financial forecasts, which appear reasonable and include additional debt service costs rolling on in 2018 from a planned debt issuance, project Fitch-calculated DSC remaining very strong at over 4.0x over the next five years.

Reserves have declined somewhat primarily due to the city's prudent $23 million prepayment of a portion of the series 2006 bonds and pay-go funding of system capital needs. Nevertheless, liquidity was still solid at 493 DCOH in fiscal 2015; expectations are for continued balance sheet strength over the next five years. The city is proactive in its capital and financial forecasting, which has allowed it to successfully manage historical growth pressures.

MANAGEABLE CAPITAL NEEDS; FAVORABLE DEBT PROFILE

To meet ongoing needs and accommodate expected future growth, the city anticipates spending around $177 million on capital projects over the 2017 to 2021 period. Capital spending is up by 38% from the 2014 to 2018 capital improvement plan (CIP), largely driven by some large projects in the storm water plan related to redevelopment at Fitzsimons and new in-fill land development. Most of these needs are anticipated to be funded from cash reserves and approximately $66 million in bonds.

The system has a very favorable debt profile, with low debt-to-funds available for debt service at 1.9x and debt-to-plant at just 7% (relative to the category 'AAA' medians of 4x and 27%, respectively). Debt levels should remain low, even taking into account planned issuances. The system's debt burden has benefitted from the city's prepayment of debt and the city will continue to search for prepayment opportunities; however, they are becoming more limited.

RATE AFFORDABILITY REMAINS

The city has consistently adopted annual rate hikes related to both the sewer and storm water rates in recent years. Double-digit increases for both systems were experienced from 2006 to 2008 to elevate the rate base sufficient to generate the strong cash flows for the debt issued in 2006 as well as pay for the pay-go component of the CIP. Rate hikes have moderated somewhat since 2009 and have been driven by pass-through costs from MWRD and capital needs related to storm water.

Currently the combined sewer and water bill is 1.6% of MHI, under the 2% Fitch affordability threshold (the bill including storm water charges is slightly higher at 1.8% of MHI). Rates include a strong portion (29%) of fixed charges. The city will continue to pass through MWRD rates but attempt to soften the impact to ratepayers and is planning on 3% annual rate increases from 2018 through 2022. Storm water rates, unchanged since 2011, have planned increases of 12% in 2016, 11% in 2017, and 3% annually thereafter through 2022. Even with the planned rate increases, rates should remain affordable.

POTENTIAL PRESSURE FROM RISING WHOLESALE COSTS

In addition to its own capital needs, the system indirectly finances capital costs related to its wholesale sewer treatment provider, MWRD, in which the system contributes around 20% of MWRD's annual revenue base. Currently, MWRD is in the midst of an expansive capital plan to meet regulatory requirements and expand its wastewater treatment facilities. The city is anticipating MWRD rate increases of 5% annually over the 2018 to 2022 period. The system faces wholesale cost pressures as the payments to MWRD account for 55% of operating costs in 2015; nevertheless, costs have remained at a steady 55% of operating expenses over the past few years.

Fitch expects that even after factoring in the current and anticipated obligations to MWRD, the system's financial profile should remain strong and compare favorably to similarly rated service providers.