December 14, 2012 / 7:56 PM / 5 years ago

TEXT - Fitch affirms Canal Winchester, Ohio sewer revs

Dec 4 - Fitch affirms the ratings on the following revenue bonds of the City
of Canal Winchester (the city):  

Approximately $4 million sanitary sewer system first mortgage revenue refunding 
bonds, series 2004 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the pledge of the net revenues of the city's wastewater
collection and treatment system. The bonds are additionally secured by a first 
lien mortgage on the assets of the system and a cash-funded debt service reserve
fund. 

KEY RATING DRIVERS

DEPENDENCE ON CONNECTION FEES:  Debt service coverage remains good at 1.7x on an
all-in basis; however, coverage excluding connection fees registers at a weak 
1.0x. 

STRONG LIQUIDITY; AMPLE RESERVES:  Consistently strong levels of liquidity, with
cash on hand equivalent to approximately five years of operating expenses in 
fiscal 2011.

INHERENT REVENUE VOLATILITY: The city's rate structure is solely comprised of 
volumetric charges creating more inherent volatility, highlighting the 
importance of maintenance of ample financial cushion.

SHIFT TO GAAP ACCOUNTING: Fitch views as a credit positive the city's shift in 
reporting to a GAAP basis, from cash, for fiscal 2011, creating more 
transparency in financial statements.

DECLINING DEBT BURDEN: Debt per capita is just over $550, falling below the 'A' 
median level of $728. Fitch expects debt levels to decline given the system's 
limited capital needs and rapid amortization of outstanding debt.

STABLE SERVICE AREA: The system services an affluent, rapidly growing 
residential customer base situated southeast of the state capital of Columbus.

WHAT COULD TRIGGER RATING ACTION

DETERIORATION OF FINANCIAL POSITION: Failure to generate at least sum sufficient
debt service coverage from recurring revenues would be viewed negatively.

CREDIT PROFILE

The retail sewer utility serves a population of 9,500, including the city 
itself, the nearby village of Lithopolis, and parts of the City of Pickerington.
The system's treatment facility was upgraded in 1998 to its present day capacity
of 2.5 million gallons daily (mgd), which is designed to serve a population of 
25,000. 

RELIANCE ON CONNECTION FEES

Connection fees, which once comprised a large portion of the utility's total 
revenue, declined sharply in 2008 due to the economic downturn. Historically, 
management controlled system costs while consistently implementing rate 
increases averaging 2% a year since 2006.

Operating costs increased in 2011 due to rising utility and chemical costs. As a
result, financial performance declined slightly in 2011, but debt service 
coverage was sound at 1.7x on an all in basis. 

However, coverage excluding connection fees registered a weak 1.0x. Fitch is 
concerned with the system's reliance on one time connection fee revenue to 
support operations. Fitch anticipates stable financial performance over the 
short term, given that the city has adopted an ordinance that continues to 
increase rates by an average of 2% annually thru 2014. 

Fitch notes that prior to 2011 the city utilized cash-basis accounting in the 
presentation of its annual financial statements, which Fitch considers a credit 
weakness, as it does not allow for fiscal transparency. The city changes its 
accounting presentation starting in 2011 when it changed its designation from a 
village to a city, in accordance with state statute. 

AFFORDABLE RATES, AMPLE RESERVES

Rates remain very affordable at 0.4% of MHI despite the recent rate increases. 
However the absence of a base rate component results in the system being 
dependent on volume demand. The utility established a rate stabilization fund in
2004 to temper the size of rate adjustments. The rate stabilization fund was 
funded over time and has now reached a balance of $1.4 million (over 100% of 
fiscal 2011 operating revenues). Management plans to use these funds in lieu of 
more significant rate adjustments and to continue to invest in the quality of 
the infrastructure.

DECREASING DEBT PROFILE

The system is reportedly in compliance with all regulatory requirements, and 
capital needs are considered flexible. The system's 2012 - 2017 capital 
improvement plan (CIP) totals approximately $3.5 million, which Fitch considers 
manageable for a system this size. The system maintains a sewer connection fee 
fund and plans to utilize the fund to finance the CIP plan in addition to state 
revolving loan proceeds of $1.1 million approved in 2011. 

Debt ratios grew slightly in 2011 with the addition of $1 million in state 
revolving loans. Debt to net plant is high at 76%, but adequate for the rating 
level and debt per capita ratio of over $550 is on par with the 'A' rating 
category. Amortization is rapid with principal payout at 68% in 10 years, and 
100% in 20 years. With no further debt anticipated, debt levels should decline. 

SOUND ECONOMIC BASE

Canal Winchester is located 12 miles southeast of downtown Columbus (GOs rated 
'AAA' with a Stable Outlook by Fitch). The village's population has grown 
rapidly, averaging over 4% growth annually since 2005 to an estimate of over 
7,100 in 2010. Wealth levels are above average, as 2010 median household income 
(MHI) for the village was 159% and 145% of the state and nation, respectively. 
Unemployment in Franklin county, at 5.8% in September 2012, remains below Ohio's
6.5% and the national rate of 7.6% in the same period.

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