Springboro (City of) OH Sewer Enterprise
Sewer System Mortgage Revenue Refunding Bonds
Expected Sale Date
NEW YORK, Aug 25, 2011 -- Moody's Investors Service has assigned an initial Aa3 rating to the City of
Springboro's (OH) $2.1 million Sewer System Mortgage Revenue Refunding Bonds,
SUMMARY RATING RATIONALE
Debt service on the bonds is secured by a combination of net operating revenues
of the city's sewer system and the city's 0.5% capital improvements income tax.
Proceeds of the bonds will be used to refund outstanding sewer revenue bonds,
Series 1997. Assignment of the Aa3 rating reflects the system's stable and
diverse customer base, stable financial operations with sound coverage
levels, satisfactory legal covenants that include a fully funded debt
service reserve fund, and manageable debt ratio.
- Stable and diverse service area near Dayton metropolitan region
- Healthy system liquidity and sound financial ratios, including debt service
- Annual rate increases stipulated by city ordinance
- Inclusion of economically-sensitive income tax revenues as bond security
- Relatively limited service area compared to similarly-rated systems
DETAILED CREDIT SUMMARY
MODESTLY-SIZED SERVICE AREA NEAR DAYTON METROPOLITAN REGION
The system's customer base is expected to remain stable over the near term,
given recent and expected population growth, as well as the diverse nature of
the customer profile. Located along I-75, the city is approximately 15 miles
south of Dayton (general obligation rated Aa2/stable outlook) and 40 miles north
of Cincinnati (Aa1/stable outlook). The city's moderately-sized tax base of
$1.4 million has grown at an average annual rate of 1% over the past five years.
Concurrent with tax base expansion, the city has also experienced significant
growth in population, which increased 40.6% to 17,409 people between the 2000
and 2010 census periods. Over the long term, the city is expected to
exhibit moderate growth due to a location that enables it to capture ongoing
suburban expansion from both the Dayton and Cincinnati metropolitan areas.
In addition to serving the city, the Springboro sewer system also provides
service to portions of surrounding communities outside of the corporate limits.
Over the past five years, the system's total number of customers has fluctuated
between 7,000 and 7,100. The system saw a decline in customers in 2010 to a
total of 6,878, which was likely due to the national economic slowdown and its
impact on residential markets over the past couple years. With housing markets
stabilizing, officials report that the system is again servicing close to 7,000
customers in 2011. The decline in customers had a limited impact on revenue as
the city charges a base monthly fee as part of its billing structure, somewhat
mitigating the loss of revenue associated with reduced usage. Favorably, the
system's customer base is diverse, with the top ten customers accounting for a
modest 5% of billed revenues in 2010. Daily flow of the system averaged
approximately 1.5 million gallons in 2010, compared to a capacity of 6 million
gallons. The city is not currently subject to any EPA mandates.
HEALTHY FINANCIAL OPERATIONS; SOUND DEBT SERVICE COVERAGE
The system's financial operations are expected to remain healthy over the near
term given current liquidity, sound debt service coverage, and regular increases
in sewer rates. In fiscal 2008, the system's net working capital totaled $3.75
million, or a strong 222.8% of operating and maintenance (O&M) expenditures.
In fiscal 2009, the city transferred funds out of the sewer system to assist
with financing municipal building improvements. As a result, net working capital
declined to $3 million and remained at that amount at the close of fiscal 2010.
Despite the decline, we note that net working capital at the close of
fiscal 2010 remained a healthy 172.2% of O&M in that same year. Officials
report that unrestricted cash reserves totaled $1.7 million in fiscal 2010 and
are expected to decline to $1.4 million in fiscal 2011. The decline is primarily
due to the use of available cash to support debt service in 2011 as the city's
rate increase was not effective until April. Looking ahead, officials expect to
maintain cash reserves of $1.4 million, or 80% of fiscal 2010 O&M, through
2012 and to gradually increase the system's cash balance over the longer term.
All of the system's outstanding revenue debt, including the current bonds, is
secured by senior liens on both net operating revenues of the system and revenue
generated by the city's 0.5% capital improvements income tax. In 1988, city
residents elected to increase the city's income tax from 1% to 1.5%, with the
additional revenue dedicated to financing capital improvements and associated
debt service. Per ordinance, sewer system revenue debt has a senior lien on the
revenue generated by the additional income tax, followed by the city's
outstanding water system revenue debt. Total income tax collections declined
modestly in 2008 and 2009, but rebounded in 2010, during which the city
collected approximately $9.7 million. Of that amount, $3.2 million was available
and dedicated to capital improvements and debt service. Combined with net sewer
revenues, the $3.2 million of income tax revenue provided 2.54 times debt
service coverage on outstanding sewer revenue bonds. Total revenues
also provided maximum annual debt service coverage ($1.64 million in fiscal
2017) of 2.5 times. While the entire revenue generated by the 0.5% income tax is
available for sewer revenue debt service, the city transferred only $600,000 to
the sewer fund in fiscal 2010. An additional $460,000 was transferred to the
city's water fund, with the remainder of the revenue subsequently used to
finance other city capital improvements. Over the near term, the city expects to
use approximately $500,000 of income tax revenue to support annual debt service
in each of the two utility funds.
While the city expects to continue to transfer income tax revenue to the utility
funds, recent and expected rate increases should gradually reduce the dependence
of the two funds on that revenue source. By ordinance, both sewer and water
rates increase annually based on the three-year average national inflationary
rate. For fiscal years 2011 through 2013, the city has implemented
additional rate increases of 20%, 15%, and 15%, respectively, for sewer service.
While the 2012 and 2013 rate increases will be effective January 1 of each
respective year, the rate increase in 2011 was not effective until April.
Similar rate increases have been implemented for the city's water system. Beyond
2013, rates will again increase based on the three-year inflationary average.
Combined net sewer revenues and dedicated income tax revenues are expected to
provide 2.77 times debt service coverage in fiscal 2011. Despite the inclusion
of economically-sensitive income tax revenues as security on the bonds, strong
coverage levels and regular rate increases that should result in a reduced
dependence on income tax revenue enhance the system's overall credit quality.
MANAGEABLE DEBT RATIO; NO ADDITIONAL NEAR-TERM BORROWING
The sewer system's debt ratio is expected to remain manageable given that the
city has no specific plans to issue additional debt over the near term. The
system's debt ratio at the close of fiscal 2010 was 43.2%, which is slightly
above the median ratio of similarly-rated systems. Post-sale, the system will
have $17.1 million of revenue debt outstanding, all issued on parity.
Amortization of the system's debt is slightly below average with 52% of
outstanding revenue bond principal expected to be repaid within ten
years. Officials report no specific plans to issue additional debt over the
near term. All debt issued for the sewer enterprise is fixed rate and is not
hedged by any derivatives.
SATISFACTORY FINANCIAL COVENANTS
The legal provisions for the current bonds are satisfactory and provide adequate
security for bondholders. The current bonds are paid from a senior lien on both
the net revenues of the city's sewer system and the city's 0.5% capital
improvement income tax revenues. The rate covenant calls for combined revenues
that provide at least 1.25 times annual debt service coverage on the bonds. The
resolution provides for an adequate additional bonds test of 1.25 times
maximum annual debt service. A debt service reserve will be fully funded with
proceeds of the current bonds equal to the lesser of maximum annual debt
service, 10% of the original principal amount of the bonds, or 125% of average
annual debt service on the bonds. A similarly structured debt service reserve
fund was established with prior issuances of revenue bonds.
WHAT COULD CHANGE THE RATING - UP
- Improvement in already healthy financial ratios (debt service coverage and net
- Significant growth and further diversification of customer base
WHAT COULD CHANGE THE RATING - DOWN
- Significant reduction in annual debt service coverage
- Significant declines in liquidity and financial ratios
System: Sewer collection and treatment (closed loop)
2010 number of customers: 6,878
Fiscal 2010 net working capital: $3 million (172.2% of O&M)
Fiscal 2010 unrestricted cash: $1.7 million (97% of O&M)
Fiscal 2010 operating ratio: 66.3%
Fiscal 2010 senior lien debt service coverage: 2.54 times
Maximum annual debt service coverage (payable in 2017 and based on FY10 net
revenues): 2.5 times
Fiscal 2010 debt ratio: 43.2%
Principal amortization of outstanding revenue debt (10 years): 52.2%
Post-sale senior lien revenue debt outstanding: $17.1 million
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Analytical Framework For Water
And Sewer System Ratings published in August 1999. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Senior Credit Officer
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
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MOODY'S ASSIGNS INITIAL Aa3 RATING TO CITY OF SPRINGBORO'S (OH) $2.1 MILLION SEWER SYSTEM MORTGAGE REVENUE REFUNDING BONDS, SERIES 2011
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