OREANDA-NEWS. Fitch Ratings has affirmed its 'AA-' rating on the following Midvale City, UT (the city) obligations:

--$12.4 million water and sewer revenue bonds, series 2007B and 2010B (taxable Build America Bonds).

The Rating Outlook is Stable.

SECURITY
The bonds are payable from net revenues of the city's water and wastewater enterprise fund.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: Debt service coverage is adequate and liquidity remains sound.

STABLE SERVICE AREA: The service area, located approximately 10 miles from the economic hub of Salt Lake City, is stable with no significant customer concentration. Customer growth has been slower than expected due to the reduced pace of development of two former superfund sites.

RATE FLEXIBILITY; CONTINUED EQUALIZATION: The city maintains good rate flexibility with gradual increases and low rates relative to incomes. It successfully managed the absorption of 3,100 water customers in fiscal 2009 and continues to gradually equalize rates across service areas.

MANAGEABLE DEBT: Debt is lower than average and expected to remain so given manageable capital needs.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL MARGINS: Fitch calculated coverage of projected debt service is forecast to fall below the 1.25x rate covenant in fiscal 2016. The Stable Outlook reflects Fitch's expectation that actual financial performance will exceed this level, sufficient to meet the rate covenant. Generating sufficient operating revenues and managing expenses in order to restore coverage to levels more consistent with historical averages will be important to maintain the rating.

CREDIT PROFILE
Located in the middle of the Wasatch Front, Utah's largest population and commercial center, and approximately 10 miles south of Salt Lake City, Midvale City features a mix of residential and commercial activity. The city's water system historically provided retail services to half of the city (3,300 customers), and acquired most of the remaining water connections (3,100) in fiscal 2009. The sewer system serves about one-third of the city, with wastewater treated at the South Valley Water Reclamation Facility (SVWRF).

SUFFICIENT CAPACITY; MANAGEABLE DEBT
Midvale City's water supply is provided from groundwater for its original service area. The customers acquired in 2009 and any development in the west side of the city will be served by water purchased from the regional wholesaler Jordan Valley Water Conservancy District (Jordan Valley; water revenue bonds rated 'AA', Stable Outlook by Fitch) once a connection is completed in calendar year 2016. Jordan Valley has sufficient water supply to meet Midvale City's growth expectations.

The infrastructure needed to connect to Jordan Valley will primarily be funded by Jordan Valley as outlined in a memorandum of understanding between the two agencies. The city currently purchases water to serve these customers from Sandy City. In addition, the city expects to spend about $600,000 per year on maintenance projects on a pay/go basis. Management anticipates up to $6 million in additional borrowing in fiscal 2018 to fund aging pipe replacement and the city's share of the SVWRF phosphorus removal project. Lower than average per customer and per capita debt levels are expected to remain so over the near term despite the additional modest debt due to rapid amortization.

ADEQUATE FINANCIAL PROFILE
Financial performance has been adequate in recent years. New customer revenue and debt service payments associated with the additional water system began in fiscal 2010. Debt service coverage was better than expected in fiscals 2014 and 2015 at 1.5x and 1.3x. Over the next five years, projected debt service coverage is expected to range between 1.2x to 1.4x given reasonable rate and connection assumptions. Operating revenues will need to generate sufficient margins going forward, which is expected given the utility's rate flexibility and history of rate adjustments, in order to provide a cushion above the rate covenant of 1.25x.

The city issued $2.8 million in new debt in fiscal 2014 and $2.5 million in fiscal 2013 through private placements to fund improvements to storm water projects and to the public works facility. The pledged revenues include the water, sewer, and stormwater revenues. DSC on combined water, sewer, and stormwater does not vary significantly from that of the water and sewer coverage alone, cited above.

Liquidity remains healthy, though slightly lower, at 365 days cash at fiscal-year end 2015. The city's informal policy is to retain at least six months of operating and maintenance expenditures in its reserves, while its formal policy is three months.

RATE FLEXIBILITY AND EQUALIZATION
The utility increased rates annually for both water and sewer customers in most service areas in fiscals 2005-2012. Beginning in fiscal 2013, the city started gradually restructuring the water and sewer rates to become more consumption-based and to equalize rates across service areas. As such, annual rate changes vary by service area. In fiscal 2016, base water rates in service areas one and two are unchanged, while rates in area three declined 5%. Sewer rates are now equalized and increased 5% across the board in fiscal 2016.

Management plans to continue to equalize water rates and increase sewer rates 5% in fiscal 2017. The city council has consistently approved rate changes, and has preliminarily approved forecast changes through fiscal 2019. The system retains a degree of rate flexibility, as rates are about midrange compared to surrounding areas and at 1.4% of median household income are below average relative to Fitch's affordability threshold.

STABLE SERVICE AREA
The eastern portion of the city is largely built-out with a population of around 30,000. Development and customer growth is expected to occur on two large former superfund sites on the city's west side. One of the sites continues to experience new construction, while the other site has no development at the present time. Benefiting from its proximity to Salt Lake City, the city recorded an unemployment rate of 3% as of December 2015, which was slightly below that of the state and well below the national average. Median household income is lower than that of the state and nation.